The Bank of Japan on Tuesday introduced the nation’s first-ever negative interest rate in a bid to conquer deflation at a time when the Japanese economy is facing a downturn and conditions for the global economy remain far from certain.
The central bank announced the policy on Jan. 29 as an additional monetary easing measure. It was slated to come into effect on Tuesday.
A negative annual interest rate of minus 0.1 percent will be applied to cash above a threshold held at the BOJ. Banks that hold the cash will essentially be charged a commission, which could hurt their profits and push down market interest rates.
The central bank aims to put downward pressure on interest rates and thereby boost lending at a time when the slowdown in China and other emerging economies has started to threaten Japan’s economic recovery.
“Financial institutions’ interest rates on mortgage loans are falling,” BOJ Gov. Haruhiko Kuroda told the Diet. “The effects are expected to emerge in the real economy and (on) prices in the future.”
The yield on 10-year government bonds briefly turned negative last week, for the first time ever.
Banks are responding in various ways. Some have decided to cut mortgage rates and to lower interest rates on deposit accounts. Fund management firms have suspended soliciting investment funds linked to government bonds.
“It is expected to have a positive effect on consumption and investment and bring changes to ways of managing funds, which have shifted one-sidedly to deposits and savings,” so they can be used to expand the economy, Finance Minister Taro Aso told reporters. “Some time will be needed to see the effects.”
Initially, around ¥10 trillion in bank funds are subject to the negative interest rate, accounting for about 4 percent of the total.
The amount subject to the negative interest rate will change, but the BOJ aims to keep it within ¥10 trillion to ¥30 trillion, requiring banks to pay tens of billions of yen in commission every year.
The BOJ will continue to pay annual interest of 0.1 percent on the ¥210 trillion accumulated by the previous year through the bank’s quantitative easing policy, which involves massive purchases of government bonds.
Meanwhile, the bank will apply a zero interest rate on ¥40 trillion in required reserves as well as funds provided to financial institutions under a BOJ program to spur lending in growth areas and for disaster recovery.
The BOJ will expand the amount subject to the zero interest rate every few months to cushion the blow for banks that need to meet a negative interest rate on larger sums, according to the central bank.
U.S. credit rating agency Standard & Poor’s estimates that the negative rate could reduce operating profits by 15 percent for regional banks and 8 percent for major banks in fiscal 2016 due to commission payments and smaller income from lending and bond holdings.
“As banks’ domestic lending has already been in the red, their management is likely to be more severe,” said Ryoji Yoshizawa, an analyst at the rating agency.
As for possible side effects, Economic and Fiscal Policy Minister Nobuteru Ishihara said the government needs more time to analyze the impact. He said the measure will reinforce a virtuous economic cycle of higher wages and employment, adding he believes this is why the BOJ has adopted it.