Negative rates and Japan

It remains to be seen whether this new weapon will help Japan win its long battle against deflation, as there are limitations to which interest rates can be pushed into the negative zone


A man holding an umbrella walks in front of the Bank of Japan (BoJ) headquarters in Tokyo. 
Starting 16 February, BoJ will apply the interest rate of minus 0.1% on a portion of funds that financial institutions hold at the central bank.
Photo: Yuya Shino/Reuters
A man holding an umbrella walks in front of the Bank of Japan (BoJ) headquarters in Tokyo. Starting 16 February, BoJ will apply the interest rate of minus 0.1% on a portion of funds that financial institutions hold at the central bank. Photo: Yuya Shino/Reuters

Taking a leaf out of the European policy book, the Bank of Japan on Friday introduced a negative interest rate.

Starting 16 February, it will apply the interest rate of minus 0.1% on a portion of funds that financial institutions hold at the central bank.

Along with the ongoing asset purchase programme, the Japanese central bank is hoping that the negative rate will help it attain the 2% inflation target.

It is also willing to cut the interest rate further into negative territory if needed.

It remains to be seen whether this new weapon will help Japan win its long battle against deflation, as there are limitations to which interest rates can be pushed into the negative zone.

At some point, it will start hurting the profitability of financial institutions and will make intermediation difficult, which can adversely affect economic activity.

Meanwhile, in the financial markets, the policy is likely to add to the ongoing uncertainty and volatility.

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