The Bank of Japan's decision to introduce a negative interest rate policy last week may have surprised the markets, but it's far from clear whether it will have the effects explained by Gov. Haruhiko Kuroda of encouraing consumption and investment. Resorting to the policy that Japan has never experienced — despite possible side effects and negative consequences — may be yet another signal of the limitations of the BOJ's "unprecedented" monetary easing operations that Kuroda has pursued since 2013 as a core part of the Abe administration's bid to bust deflation.
The decision will impose a minus 0.1 percent interest rate on part of the commercial banks' deposits in their current accounts in the central bank beginning in mid-February. The idea is to prod the banks to lend more by charging them fees for keeping their money deposited in the central bank. The move is also expected to make the yen lower against other currencies.
With its target of achieving an annual 2 percent inflation to end deflation that gripped Japan since the 1990s, the BOJ under Kuroda has engaged in massive asset purchases to inject more money in the economy. But while the monetary stimulus pushed down the yen sharply lower against the dollar, boosting the profits of major companies and shoring up share prices, it has not resulted in significant increases in bank lending. Commercial banks to which the BOJ provided more funds by purchasing the government bonds they held have in turn deposited much of the funds in their accounts at the central bank — instead of lending more to consumers and businesses — due to the limited loan appetite amid the slow growth of the economy and population decline.