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BOJ adopts negative interest rate policy to beat deflation

Xinhua, February 16, 2016 Adjust font size:

Japan's central bank on Tuesday launched its inaugural negative interest rate policy in a bid to try and keep money flowing into markets and beat deflation, as the country's options to spur growth continue to wane against a backdrop of domestic and global economic uncertainty.

Under its new policy, first announced late last month, the Bank of Japan (BOJ) will adopt a negative annual interest rate of minus 0.1 percent to some of the accounts held by financial institutions, to encourage them to release funds back into the economy, by spending or reinvesting.

Around 10 trillion yen (88 billion U.S. dollars) in financial institutions' funds will be affected by the negative interest rate, the bank has said, which translates to around 4 percent of the BOJ's holdings.

The bank has said it plans to maintain the amount subject to the minus rate at between 10 trillion to 30 trillion yen, with the bank still paying an annual interest of 0.1 percent on the 210 trillion yen accumulated the previous year through the bank's quantitative easing policy, which saw a huge amount of government bonds purchased.

Forty trillion yen in required reserves will also be subject to the new rate, as will provisions made to private banks under previous stimulus programs, the BOJ said.

Japanese Finance Minister Taro Aso said the BOJ's latest move will help boost consumption, which according to the latest GDP figures, turned negative in the last quarter and contributed to an economic contraction. The figures also showed that inflation was largely flat, exports and imports both sluggish and businesses' profits not translating into increased wages.

Aso also said, however, that the negative interest rate would help spur investment.

"It is expected to have a positive effect on consumption and investment and bring changes to ways of managing funds, which have shifted one-sidedly to deposits and savings, so they can be used to expand the economy," Aso told reporters.

Some analysts believe, however, that as with currency intervention, the BOJ's latest move will have an ever diminishing impact on the economy, as time passes by, despite BOJ Governor Haruhiko Kuroda saying he will plunge the rate further into negative territory if necessary.

"Some time will be needed to see the effects," Aso also said. Enditem