The Bank of Japan in a surprise move has joined the ranks of central banks from Switzerland, Denmark, Sweden and now the ECB in introducing a negative benchmark interest rate.
The action that was taken by the Bank of Japan’s Governor, Mr Haruhiko Kuroda, means that Japanese commercial banks will now have to pay a negative interest rate of 0.1% on deposit with the central bank.
This morning’s announcement follows disappointing news on the inflation front, with the Japanese Statistics Bureau publishing a National Core CPI release for December of just 0.1%.
Mr Kuroda had warned investors a few weeks back that the Bank of Japan had plans to introduce further stimulus. The BOJ Governor hinted that a move was in the offing when he addressed the Japanese Parliament's Budget Committee.
It would appear that the catalyst for this morning’s move on rate was the poor inflation number. However, the decision to cut rate was far from a unified response. This can be seen by the voting on the BOJ’s monetary committee which approved the decision with a 5 to 4 vote in favor of a rate cut.
Central banks in developed nations are unified in their concerns over inflation targeting. The Bank of Japan, as with other guardians of monetary policy such as the FOMC and Bank of England, have been trying since the great recession of 2008 to inject inflation into their economies. However, inflation is stubbornly failing to inch towards the 2% target.
By taking this action, the Bank of Japan hopes that it will force local retail and investment banks to lend rather than deposit cash for a penalty at the central bank. The jury is out however on the merits of such a move.
Cutting interest rates are seen very much as the last tool in the box that a central bank can use. However, forcing banks to lend to businesses may not be so easy. Especially when businesses lack investment opportunities that borrowed money can be invested in.
Taiwan, Korea, and China have over the years eroded the Japanese dominance of the consumer electronics market. Korea and now China are competing on cost in shipbuilding and the automotive sector. Even the once strong mobile telecommunication sector is struggling against competition from cheaper Asian products.
Although an increase in bank credit lines is a welcome addition, it does not solve the problems that only deep structural reforms will bring.
The problem for the Japanese economy is that with a ballooning public deficit, anaemic growth and low inflation, the BOJ has little time to fix problems that took many years to manifest.