FX.co ★ Bank of Japan shocks markets by introducing negative interest rate

As soon as it became clear that the ambitious plan to reinvigorate Japan’s economy is about to falter, the Bank of Japan took the interest rate to the negative zone for the first time ever. The central bank decided to make this move after it assessed the negative effects of the turmoil in the global market, weak inflation, and elevated risks.

The regulator cut interest rate on deposits made by financial institutions from positive 0.1 percent to minus 0.1 percent. The Bank of Japan “will cut the interest rate further into negative territory if judged as necessary”, according to its official statement. Moreover, the regulator plans to raise the monetary base at an annual pace of 80 trillion yen. All these measures aim to achieve the bank’s 2 percent inflation target. Policymakers at the Bank of Japan expect the core inflation to remain within the range of 0.2 percent to 1.2 percent between April 2016 and March 2017. Earlier, Bank of Japan’s Governor Haruhiko Kuroda used to give a more optimistic outlook and hoped to hit the inflation target by the end of 2016. Financial markets did not expect the Japanese central bank to cut the interest rate into the negative territory.

Recently most central bankers took rather predictable steps. Speaking about Japan’s regulator, most analysts projected that the bank would only take additional stimulus measures. So, negative rates came as a surprise to them. Following the decision, the stocks of the companies listed on the Tokyo Stock Exchange rallied. The main Japanese index Nikkei that tracks stock prices of 225 Japan’s leading companies rose by near 600 points, or 3.37 percent, to 17,615.83 points. At the same time, the yen slid by 1.7 percent to 120.89 against the US dollar.