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Business Insight

BOJ Adopts Negative Interest Rate

Policymakers at the Bank of Japan said Friday that they're taking the unusual step of introducing a negative interest rate. The announcement came at the end of a two-day meeting of the central bank's policy board.

The rate will apply to current accounts held by financial institutions, with the aim of prompting those institutions to boost lending.

"So far, we have taken quantitative and qualitative easing measures. Now we decided to add easing measures on interest rates," Bank of Japan Governor Haruhiko Kuroda told reporters. "That will allow us to conduct additional easing in three dimensions."

Kuroda said falling crude oil prices and growing uncertainties in China are complicating the bid to hit Japan's inflation target. He said the new policy will limit these risks.

The decision was a close call. Five board members supported the proposal, while four were against it.

The policymakers also said they're pushing back the target date to achieve the bank's 2-percent inflation target again, this time to the first half of fiscal 2017.

Senior commentator Akihiro Mikoda joined anchor Gene Otani in the studio to discuss the Bank of Japan's decision.

Otani: This is the first time this kind of thing has happened. First of all, how does this work?

Mikoda: Basically, policymakers hope that negative interest rates will encourage commercial banks to lend more to stimulate investment and growth. The Japanese law requires commercial banks to deposit surplus money at the Bank of Japan, so that they can surely return money to depositors when requested. With negative interest rate, BOJ will impose a fee on deposits. It means banks will be penalized for keeping reserves. Right now, the central bank pays commercial banks interest on the funds they keep there. With the introduction of the new policy, BOJ expects commercial banks to lend more money for private companies to avoid punishment.

Otani: The big question is why now? Why did Bank of Japan policymakers decide to apply this policy?

Mikoda: Simply put, to achieve their 2 percent inflation target. Policymakers have seen a persistent fall of crude-oil prices. BOJ officials kept saying prices would rise so people should spend and invest money now. Their idea was to vitalize investment and consumption by injecting massive amount of money into markets. They thought this would lead to an increase in both consumer prices and wages, and pull Japan out of deflation. But while commodity prices continue to fall, businesses might doubt BOJ's scenario. So this is the very reason BOJ introduced this unprecedented measure.

Otani: You've been covering the economic situation in Japan for quite a while. Do you think this will actually be effective?

Mikoda: There are a lot of uncertainties. If additional easing weakens the yen further, and pushes up exporter profits, that would raise business owners' spirits. They might then raise wages for workers and put more money into investment. But many experts are skeptical about the effect of this extraordinary measure. They question if private companies really have a strong appetite for loans even after commercial banks keep more money on hand. Another question is, wouldn't lowering interest rates to this level paralyze the market? And we have to think about what is really pushing down prices. The causes of the fall in oil prices and China's slowdown are not in the control of Japanese policymakers. There is a view that monetary by the BOJ alone, will have a limited effect on prices.

Otani: So what's essential to boost the Japanese economy, do you think?

Mikoda: Amid controversy, by going ahead with additional easing, the BOJ showed strong resolution to end deflation and hit its inflation target. But it is difficult to prop up the Japanese economy further solely by monetary measures. The key lies with, to what extent companies agree to raise wages in upcoming annual negotiations. And how confident companies can feel about the future and how much money they will put into investment.

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