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29 Jan

Bank of Japan to curtail Interest rate below zero:

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Economic slowdown in China,plunging oil prices is a concern around the world makes the Japan's central bank to introduce negative benchmark interest rate.
 
Despite nearly a quarter-century of slow growth, the Bank of Japan had resisted reducing rates below zero to stimulate the economy. The 5-4 vote on the bank’s policy committee showed how reluctant it was to embrace a change in that thinking.
 
But the board of governors took great pains to say the move was based on global conditions, not the Japanese economy itself, which has seen mixed results from Prime Minister Shinzo Abe’s program of reforms.
 
“Japan’s economy has continued to recover moderately,” the bank said in a news release. “Recently, however, global financial markets have been volatile against the backdrop of the further decline in crude oil prices.”
 
Those changes might hurt the business confidence of Japanese companies and encourage deflation, the bank added, and the measures announced on Friday would “pre-empt the manifestation of this risk.”
 
Its decision to charge commercial banks for holding their money instead of paying them interest signaled a new willingness to pull out all the stops in a bid to bolster economic growth.
 
In a statement explaining the move, the Bank of Japan even said that it might “cut the interest rate further into negative territory if judged as necessary.” Penalizing commercial banks for keeping money on deposit at the central bank puts pressure on them to lend instead. That makes it easier for companies to invest in new projects and easier for consumers to borrow and spend.
 
The Japanese central bank was also uncommonly blunt in mentioning the economy of another country, China, as one of the risks that could damage Japan’s economy.
 
The new negative interest rate, minus 0.1 percent, will take effect on Feb. 16. It will only be assessed on balances that commercial banks deposit at the central bank that exceed regulatory minimums.
 
The Japanese central bank will continue paying its existing rate of 0.1 percent on some reserves that banks have already placed. And it will pay no interest on certain reserves that are held to meet regulatory requirements.
 
Three other countries already have negative interest rates. Denmark has an interest rate of minus 0.65 percent, Switzerland’s is minus 0.75 percent and Sweden’s is minus 1.1 percent. Deposits held by the European Central Bank also have a negative rate: minus 0.3 percent.
 
Although negative interest rates send a dramatic signal about a willingness to ease monetary policy, the practical effects of the Bank of Japan’s action are actually limited.
 
The central bank could have opted instead to expand its already considerable purchases of bonds, in a bid to drive near-zero interest rates in debt markets even lower. But it chose not to do so, a decision that may indicate a hope on the part of some Japanese central bankers that Mr. Abe’s government will also adopt fiscal measures to help the economy.
 
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Comments

  • Maribeth - May 12,2016

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