The Bank of Japan (BoJ) announced that it would follow the lead of countries like Denmark, Sweden and Switzerland by introducing a negative benchmark interest rate of -0.1%, in a bid to combat deflation.
As a result of the decision, which was adopted by a close 5-4 majority vote, the BoJ will apply a negative interest rate of -0.1% to current accounts that financial institutions hold at the central bank. It also opened the possibility of further interest cuts if needed.
Meanwhile, the BoJ maintains the level of its money market operations, with the target being an increase of its monetary base at an annual pace of Y80trn.
The move came as a surprise to traders, with BoJ governor Haruhiko Kuroda stating just last week in front of the Japanese parliament that he was not planning to adopt negative interest rates.
However, Simon Smith, chief economist at FxPro Insights stressed that further weak trade data coming through this week must have increased the pressure on the BoJ to further ease monetary policy.
“..Doing this via asset purchases wouldn’t be easy due to their already extensive activity in the JGB market which is rather illiquid now as a result, so cutting rates at this moment in time is the only option open to them and they have even signalled that more is to come” Smith comments.
The rate cut announcement has triggered unrest on foreign exchange markets, with the Japanese Yen swiftly falling by 1.65% against the US dollar as of 10am CET.
Stock markets on the other hand responded positive, with the Nikkei 400 growing by 2.95% the Dax30 recovering some of the losses of the previous trading day at +1.35% and the FTSE100 also opening at 0.92% as of 10.30am CET.
“Looking at the Effect of ‘QQE with a negative interest rate’ critical aspects must be pointed out. It remains questionable whether the incentives of negative interest rates on the ‘Policy Rate Balance’ will actually result in improved lending conditions for Japanese financial businesses. Critics would point to the danger of Kuroda boosting a new asset price bubble on financial markets” warns Frederik Kunze, analyst at German Bank NordLB.