World Economy

BOJ Goes Negative, Stuns Stock Markets

BOJ Goes Negative,  Stuns Stock Markets BOJ Goes Negative,  Stuns Stock Markets

The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to stimulate the economy as volatile markets and slowing global growth threaten its efforts to overcome deflation.

Global equities jumped, the yen tumbled and sovereign bonds rallied after the BOJ said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank, Reuters reported.

"What's important is to show people that the BOJ is strongly committed to achieving 2% inflation and that it will do whatever it takes to achieve it," BOJ Governor Haruhiko Kuroda told a news conference after the decision.

In adopting negative interest rates Japan is reaching for a new weapon in its long battle against deflation, which since the 1990s have discouraged consumers from buying big because they expect prices to fall further. Deflation is seen as the root of two decades of economic malaise.

Kuroda said the world's third-biggest economy was recovering moderately and the underlying price trend was rising steadily.

Forestall Risks

"But there's a risk further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset," he said. "The BOJ decided to adopt negative interest rates ... to forestall such risks from materializing."

Kuroda said as recently as last week he was not thinking of adopting a negative interest rate policy for now, telling parliament that further easing would likely take the form of an expansion of its massive asset-buying program.

But, with consumer inflation just 0.1% in the year to December despite three years of aggressive money-printing, the BOJ's policy board decided in a narrow 5-4 vote to charge a 0.1% interest on a portion of current account deposits that financial institutions hold with it.

Effectiveness Questioned

The central bank said in a statement announcing the decision it would cut interest rates further into negative territory if necessary, in its battle against deflation.

"Kuroda had been saying that he didn't think something like this would help so it is a bit surprising and it's clear the market has been surprised by it," said Nicholas Smith, a strategist at CLSA based in Tokyo.

Some economists doubted the BOJ move would prove effective. "It has gone on the defensive," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. "It made this decision not because it's effective, but because markets are collapsing and it feels it has no other option."

Step Up Lending

Several European central banks have cut key rates below zero, and the ECB became the first major central bank to do so in June 2014.

In pursuing the same path, the BOJ is hoping banks will step up lending to support activity in the real economy, rather than pay a penalty to deposit excess cash at the central bank.

There is little sign of any pent-up demand from Japanese banks or cash-rich companies for fresh funds, however, and any money released into the system may merely be hoarded or steered into speculative activity.

The BOJ maintained its pledge to expand base money at an annual pace of 80 trillion yen ($675 billion) via aggressive purchases of Japanese government bonds and risky assets conducted under its quantitative and qualitative easing program.

The BOJ's move–boosting the dollar by 1.7% against the yen–could make it even harder for the US Federal Reserve to raise interest rates four times this year, as originally envisaged by its policy board.

Shares, Currencies

Asian shares jumped on Friday and the yen swooned following the BOJ move. The yen fell across the board and sovereign bonds rallied.

The dollar was up 0.44% against a basket of currencies, while the euro eased back to $1.09.

Japan's Nikkei share index extended early gains to rise 3.4%, and lifted bourses across the region. MSCI's broadest index of Asia-Pacific shares outside Japan jumped 1.3%. The Shanghai benchmark rose 2%, attempting to bounce from steep losses early in the week.

Fed fund futures rose to imply a rate of 51 basis points by year end, compared to 90 basis points a month ago. Futures for US 10-year bonds rose five ticks.

US crude was up a further 35 cents at $33.55 per barrel, while Brent futures firmed 36 cents to $34.25.