In a surprise decision, the Bank of Japan (BoJ) has announced a policy of negative interest rates in an attempt to boost the country’s flagging economy.
“At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to introduce “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate” in order to achieve the price stability target of 2 percent at the earliest possible time. Going forward, the Bank will pursue monetary easing by making full use of possible measures in terms of three dimensions; quantity, quality, and interest rate”.
In a 5-4 vote, the Bank of Japan’s board imposed a 0.1% fee on deposits left with the Bank of Japan, effectively a negative interest rate, from the reserve maintenance period, which commences from February16, 2016.
The authorities hope negative interest rates will encourage commercial banks to lend more to promote investment and growth, and drive inflation higher. Latest data showed that Japan’s inflation rate came in at 0.5% in 2015, well below the BoJ’s 2.0% target.
This experiment takes Japan into new and uncharted territory.
“Japan’s economy has continued to recover moderately, with a virtuous cycle from income to spending operating in both the household and corporate sectors, and the underlying trend in inflation has been rising steadily. Recently, however, global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy. For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected”.
The Bank will adopt a three-tier system in which the outstanding balance of each financial institution’s current account at the Bank will be divided into three tiers, to each of which a positive interest rate, a zero interest rate or a negative interest rate will be applied, respectively.
1. The Three-Tier System
(1) Basic Balance: a positive interest rate of 0.1 percent will be applied With regard to the outstanding balance of current account at the Bank that each financial institution accumulated under QQE, the Bank will continue to apply the same interest rate as before. The average outstanding balance of current account, which each financial institution held during benchmark reserve maintenance periods from January 2015 to December 2015, corresponds to the existing balance and will be regarded as the basic balance to which a positive interest rate of 0.1 percent will be applied.
(2) Macro Add-on Balance: a zero interest rate will be applied A zero interest rate will be applied to the sum of the following amounts outstanding.
a) The amount outstanding of the required reserves held by financial institutions subject to the Reserve Requirement System
b) The amount outstanding of the Bank’s provision of credit through the Loan Support Program and the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas affected by the Great East Japan Earthquake for financial institutions that are using these programs c) The balance calculated as a certain ratio of the amount outstanding of its basic balance in (1) (macro add-on). The calculation will be made at an appropriate timing, taking account of the fact that the outstanding balances of current accounts at the Bank will increase on an aggregate basis as the asset purchases progress under “QQE with a Negative Interest Rate.”
(3) Policy-Rate Balance: a negative interest rate of minus 0.1 percent will be applied A negative interest rate of minus 0.1 percent will be applied to the outstanding balance of each financial institution’s current account at the Bank in excess of the amounts outstanding of (1) and (2) combined.
Also, the Bank decided, by an 8-1 majority vote, to set the following guideline for money market operations for the intermeeting period. The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.
“a) The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen.3 With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank’s JGB purchases will be about 7-12 years.
b) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 3 trillion yen4 and about 90 billion yen, respectively.
c) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively”.
