Japan adopts negative interest rate in surprise move

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From: http://www.bbc.com/news/business-35436187

In a surprise move, the Bank of Japan has introduced a negative interest rate to counter the ongoing economic slump in the world’s third-largest economy.

The rate of -0.1% will mean that the central bank will in fact charge money for holding some deposits.

It is hoped this will drive up inflation and boost economic growth.

The European Central Bank also has negative rates in a bid to keep the EU economy afloat, however, it is the first time for Japan.

The decision came in a narrow 5-4 vote at the Bank of Japan’s first meeting of the year on Friday.

“The BOJ will cut interest rates further into negative territory if judged as necessary,” the BOJ said in a statement, adding it would continue as long as needed to achieve an inflation target of 2%

Earlier in the day, fresh economic data had again highlighted concerns over economic growth. The December core inflation rate was shown to be at 0.1% – far below the central bank target.

Asian shares jumped and the yen fell across the board in reaction to the announcement.

Why negative rates?

Japan is currently facing very low inflation, which means that people and companies tend to hold on to their money on the assumption that they can get more for it later in time.

So rather than spend or invest it, they will keep it in the bank.

Cutting the cost of borrowing is an incentive that should boost both domestic spending and business investment.

It is also aimed at driving inflation up, which is another incentive for people and businesses to spend rather than save.

On Friday, data also showed the country’s industrial output dropped by 1.4% in December from the previous month – weaker than estimates had suggested.

It was the second month of decline, underscoring that flagging external as well as domestic demand was weighing on Japan’s economy.

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