What you need to know about negative interest rates in Japan

What you need to know about negative interest rates in JapanIn an unexpected move at the end of last week, the Bank of Japan moved its key interest rate into negative territory.

This was the latest attempt to re-inflate the Japanese economy, which has suffered for years with chronic deflation.

The Bank of Japan cut the interest rate on excess reserves to -0.1%.

Excess reserves are the cash banks and other financial institutions must keep with the Bank of Japan which exceed the minimum regulatory requirements.

They kept the interest rate paid on most existing reserves at 0.1%, with the interest rate for required reserves cut to zero.

The Bank of Japan reserve rates are slightly confusing compared to the European Central Bank, which has maintained a single negative interest rate for financial institutions since June 2014.

Negative interest rates can be used to encourage price inflation or alternatively to prevent the value of a currency from rising too much.

In Japan, where they have consistently struggled to stimulate price inflation, a negative interest rate on excess reserves will hopefully encourage greater liquidity in money markets.

If you’re a bank having to pay the central bank to keep your excess reserves on deposit with them, then hopefully it will encourage you to lend more money to businesses and individuals where you can actually make a profit.

Following the Bank of Japan’s decision to adopt negative interest rates, Trevor Greetham, Head of Multi Asset at Royal London Asset Management, commented:

“Market stress is again triggering policy ease by the world’s largest central banks, in an echo of the events of autumn last year.

“The Bank of Japan has surprised the market today by moving to a negative interest rate policy.

“Mario Draghi signalled that there would be further ease from the European Central Bank at the next meeting. Meanwhile, the January Federal Open Market Committee statement set the bar very high for a March rate hike in the US.

“Concerns over growth in China helped to trigger a plunge in chronically over-supplied commodity markets. A deflationary shock like this will always be met with monetary easing.

“With investor sentiment deeply oversold we have been buying equities and remain overweight Europe and Japan, the regions where policy is loosest.”

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About Martin Bamford

Martin Bamford is a Chartered Financial Planner, Certified Financial Planner (CFP) professional and published personal finance author. He works with elderly clients to provide advice on funding residential care fees, hosts the Informed Choice Podcast and is a keen ultra runner.
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