The Yen came down crashing against major currencies on the Bank of Japan unexpectedly cutting the benchmark rate, below zero. Neither Japanese bond yield spared as they came plunged to record lows. A vote of 5-4 to put an interest rate of minus 0.1 all but ended the Yen’s impressive rally in the recent past. The yen tanked by more than 2% against the dollar after the announcement.
The central bank has already warned that it could cut the rate even further should the economy fail to pick. Volatile markets amidst a slowing global economy have all but continued to dent BOJs effort that seeks to beat deflation. Slumping Tokyo stocks on the other hand continue to derail BOJ’s efforts that seek to trigger positive momentum.
The cut caught many investors by surprise. BOJ Governor, Haruhiko Kuroda, had as early as last week reiterated they were not considering adopting negative interest rates. Kuroda had initially told parliament that further easing would focus on massive asset buying. As it appears, that was never the case.
Impact of Negative Interest Rate
Negative interest rates are now seen as a new weapon that the BOJ is using to curb deflation levels that have clocked levels not seen in years. The central bank says that negative interest rates seek to stall the risk of global financial turbulence affecting business confidence back at home.
The surprise interest rate comes on the heels of economic data showing household spending and output slumped in December. The data further underscores the fragile nature of Japan’s economy that continues to grapple with the effects of a volatile financial markets and China’s economic downturn.
Japan is not the first country to cut interest rates below the zero. The European Central Bank became the first bank to venture into the negative territory in 2014. Negative interest rates most of the time go a long way in helping support lending activities to benefit local economies
With the cut, the BOJ has reiterated plans to expand the base money at an annual pace of $675 billion. This will mostly be used to accelerate the purchase of Japanese government bonds. The central bank is also planning to buy risky assets under the Quantitative and qualitative easing program.