Japan’s central bank has surprised world markets by introducing a negative deposit rate for commercial banks to park money with it – in a bid to get them to lend the money instead, Sky News reports. .
The monetary policy shift – a tactic employed by the European Central Bank for the eurozone last year – effectively means banks will have to pay an interest charge to deposit cash with the Bank of Japan (BoJ). It is another attempt to support the country’s economic recovery but it was announced at a time when both corporate Japan and consumers have been reluctant to spend.
Japan has been stuck in something of an economic rut since the 1990s. Low interest rates and other stimulus measures have so far failed to get inflation moving properly towards the BoJ’s 2% target rate, despite early support from the government of Shinzo Abe and his ‘Abenomics’ recovery strategy.
While his programme of reforms was initially credited with progress, a hike in the country’s sales tax was widely seen as counterproductive to boosting consumer spending – also held down by poor wage growth. The last measurement showed consumer spending down 4.4% in December from a year earlier.
Japan fell back into negative inflation for the first time since 2013 last Autumn – with core inflation currently running at only 0.5%. It has an active quantitative easing programme but economic growth remains anaemic given the slowdown in China especially and mixed effects of weak oil prices on its own economy.
The BoJ said on Friday that a negative interest of -0.1% would only apply to new commercial bank current account deposits with it though the rate could be extended further into negative territory in future. The bank said it wanted to see evidence that banks were lending more to individuals and businesses.
The Nikkei 225 in Tokyo closed 2.8% higher in Friday trading in response to the BoJ’s decision – but the gains were tentative. European stock markets also opened higher. But while Japan’s major companies have benefited from the effects of the country’s stimulus through a weak yen, company investment and wage growth have failed to materialise from the resulting profit haul because of economic uncertainty.
Ajay Kapur of Merrill Lynch saw this as the crucial factor, writing: “Corporate Japan has accumulated substantial cash on balance sheets, while the Japan labour market is getting tighter. “The key is to recirculate Japan’s corporate cash to Japan’s household-labour sector via wage increases otherwise ‘Abenomics’ is likely to fail in generating self-sustaining growth.”
Sanjiv Shah, chief investment officer at Sun Global Investments, said of the BoJ action: “The decision to introduce a negative rate may seem like a bold move by the Bank of Japan, but in reality it reflects the lack of options available to tackle the longstanding two-decade long deflationary pressures.
“Abenomics has really hit the limits of effective action. The only option for sustainable progress for Japan is deep structural reform.”