FRIDAY, March 29, 2024
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Bank of Japan implements negative interest rate

Bank of Japan implements negative interest rate

The Bank of Japan on Tuesday introduced a negative interest rate for the first time in Japan.

Practically speaking, when commercial banks deposit a certain amount of money in their current accounts at the central bank, a “fee” will now be collected from them.
 
With the measure, the central bank aims to encourage commercial banks to lend money to individuals and companies, with the goal of boosting the economy and pushing up prices.
 
The monetary policy has entered a new phase, and the Bank of Japan is now at a critical stage to pull the nation out of prolonged deflation.
 
In the short-term money market Tuesday, the unsecured overnight call rate became zero percent. Transactions are made at the call rate between financial institutions because some banks consider it better to lend money at a rate of zero percent rather than having a “fee” collected by the central bank, observers said.
 
“I expect the negative interest rate policy will help expand the economy,” Taro Aso, finance minister and state minister for financial services, said at a press conference after a Cabinet meeting Tuesday. “We need to take the position and observe the situation for a while.”
 
Under the negative interest rate policy, an annual interest rate of minus 0.1 percent will be adopted for some current account deposits that commercial banks hold at the Bank of Japan. This means the central bank in effect collects a “fee” from commercial banks, so the central bank expects commercial banks to actively lend money.
 
The policy is not intended to prompt adoption of negative interest rates for deposits in accounts that individuals and companies hold at commercial banks.
 
“Interest rates on housing and other loans have been considerably lowered,” Bank of Japan Governor Haruhiko Kuroda said at the House of Representatives Budget Committee meeting on Tuesday. “These effects will be reflected in the actual economy and consumer prices in the future.”
 
Following the central bank’s decision to introduce negative interest rates, commercial banks are lowering interest rates for housing loans. Among major banks, Sumitomo Mitsui Banking Corp. lowered interest rates for some loan products from Tuesday, while Mizuho Bank and Bank of Tokyo-Mitsubishi UFJ are considering doing the same. Many banks are likely to reduce interest rates for corporate loans.
 
The Bank of Japan has been continuing “quantitative and qualitative monetary easing” since April 2013, in which the central bank aims to increase the money supply through the purchase of government bonds and other measures.
 
While the Bank of Japan is aiming to achieve a 2 percent inflation target, consumer prices are not rising as the central bank had expected due to falling oil prices. For that reason, as an additional monetary easing measure, the central bank announced the decision to introduce the negative interest rate on Jan. 29.
 
Meanwhile, the introduction of the negative interest rate policy is likely to make individual asset management difficult. Interest rates on deposits at commercial banks have been declining, while there are moves by some financial institutions to end public offerings of some relatively low-risk investment trusts, such as those that manage government bonds.
 
In addition, there are some concerns over the plan to overcome deflation as envisioned by the Bank of Japan, due to the uncertain outlook for the world economy, including factors such as the slowdown of the Chinese economy and the appreciation of the yen.
 
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