By CentralBankNews.info
The Bank of Japan (BOJ) joined the ranks of four other major central banks by applying a negative interest rate of 0.1 percent on deposits that financial institutions hold at the bank and said it will cut this rate further into negative territory if necessary.
The BOJ, which launched a program of aggressive monetary easing in April 2013 to rid the country of 15 years of deflation, named its latest initiative to reach its 2 percent inflation target at the earliest possible time as “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate.”
Although the BOJ said the country’s economy was continuing to “recover moderately,” it said global financial markets had turned volatile in light of a further decline in crude oil prices and uncertainty over the prospects of emerging and commodity-exporting economies, particularly China.
“For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected,” the BOJ said, adding:
“To preempt the manifestation of this risk and to maintain momentum toward achieving the price stability target of 2 percent, the Bank decided to introduce “QQE with a Negative Interest Rate.”
The BOJ’s new system comprises three tiers, in which the outstanding balance of each financial institution’s current account will be divided into three tiers, with either a positive, a negative or a zero interest rate will be applied.
A similar multi-tier system is currently used in Switzerland, Sweden and Denmark, whose central banks also have resorted to negative interest rates, mainly to reduce the incentives to hold their currencies. The European Central Bank also has a negative deposit rate in an effort to encourage financial institutions to lend funds to businesses rather than park their money at the bank.
The BOJ said its new version of QQE will lower the short end of the yield curve and exert further downward pressure on rate across the entire yield curve. It was also designed so the BOJ can pursue additional monetary easing in both quantity, quality and interest rates if necessary to achieve its inflation target.
The BOJ’s board also confirmed that it would continue with the previous target of purchasing Japanese government bonds so their amount rises by an annual pace of about 80 trillion yen along with annual purchases of exchange-traded funds and real estate investment trusts so their amounts outstanding rises at an annual pace of about 3 trillion and about 90 billion yen, respectively.
The BOJ also confirmed that it would continue purchasing commercial paper and corporate bonds at amounts of about 2.2 trillion yen and 3.2 trillion.
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