On January 29, the Bank of Japan announced that it was introducing a negative interest rate on excess reserves, namely on new deposits that credit institutions place with the Central Bank. The rate, which is currently 0.1%, will be up to -0.1%. Reducing the deposit rate to negative values makes it unprofitable for banks to place funds on the accounts of the Central Bank — instead of receiving income, they are forced to pay the regulator. It is assumed that in this case, the funds, instead of coming to the accounts of the Central Bank, will be invested in the economy.
The negative rate will be applied only to those reserves that the Bank of Japan accrues to commercial banks during new rounds of securities repurchase from the financial sector. The existing reserves, which, according to The Financial Times, reach $2.5 trillion, will still have an interest rate of 0.1%. Bloomberg writes that the new rules will take effect from February 16.
The Central Bank will also buy government bonds, securities of funds investing in real estate, as well as exchange-traded funds in order to expand the monetary base.
Simultaneously with the introduction of a negative interest rate for part of the excess reserves, the Bank of Japan maintained a program of securities repurchase. It reaches ¥80 trillion ($666 billion) per year. Aggressive monetary measures are designed to stimulate inflation. The Bank of Japan intends to increase it to 2% per year — the level considered optimal for developed countries. According to the organization’s forecast, this goal is achievable by the period between March—October 2017. In December 2015, the annual inflation rate was 0.2%. The increase in inflation, in turn, will have to stimulate the growth of the economy, which in Japan has stagnated in recent years and only recently began to show signs of recovery.
According to updated data, in the third quarter of 2015, the country’s GDP grew by 1% in terms of annual dynamics. But industrial production, according to statistics from the Ministry of Economic Development of Japan, fell by 1.4% in December.
The decision on the negative rate was made with a minimal margin — five directors against four. A little more than a week ago, the head of the Bank of Japan, Hiroshi Kuroda, said in parliament that the regulator “is not seriously considering such a possibility.” “Chairman Kuroda has earned a bad reputation for changing course when you least expect it, and today’s move confirms this reputation,” Marcel Thelyan, an economist at Capital Economics, is quoted by CNN as saying.
​ The market went up.
After the introduction of negative rates, the yen fell against the dollar. In addition, the cost of servicing 10-year Japanese government bonds has decreased. The local stock market reacted to the news with growth. The Nikkei 225 index rose by 2.8% as of 15: 35 Moscow time. Before the rate cut, the trend was reversed: since the beginning of the year, the index has already sunk by 10%, and the yen has constantly strengthened against the dollar. European stock indexes also started the session on January 29 in the green zone.
Before the Bank of Japan, central banks of other leading states and associations had already experimented with negative rates. For example, the European Central Bank introduced a negative rate on overnight deposits in June 2014, and now the rate on them is -0.3%. As in the case of the Bank of Japan, the main purpose of this step is to stimulate inflation. Negative rates on excess reserves are also in effect in Switzerland and Sweden, and in 2012-2013 the Bank of Denmark experimented with them.
As the president of the European Central Bank, Mario Draghi, has repeatedly stated, unconventional policies (including negative rates) have helped the eurozone economy avoid deflation. “In theory, such a policy looks attractive, but it can also entail unforeseen consequences. For example, banks may decide to impose on customers the costs of depositing funds in the Central Bank, and depositors themselves will prefer to keep their money under the mattress, rather than carry it to the bank,” The Guardian argues.
The Bank of Japan’s ultra-soft monetary policy is at odds with the actions of the US Federal Reserve System. In mid-December last year, the Fed raised its key rate for the first time in nine years. Prior to this, the Fed refused large-scale interventions in the securities market. Thus, the policy of “quantitative easing” (low key rate and securities repurchase), which has been in effect in the US since 2009, has been completed.