BoJ's negative interest rate: how it works

[TOKYO] The Bank of Japan on Friday adopted a negative interest rate policy to spur lending and help drive inflation towards its two-percent target.

The -0.1 per cent interest rate introduced by the BoJ means that banks parking their money with the central bank are actually charged for doing so.

By penalising the banks for hoarding their cash, the BoJ is giving them the incentive to loan the money out, thereby pumping more cash into the economy and, hopefully, boosting economic activity.

In 2014, the ECB became the first major central bank in the world to use negative interest rates.

The BoJ had already kept its key interest rate at near zero as part of the country's easy money policy - a key weapon in Prime Minister Shinzo Abe's "Abenomics" economic revival programme.

Low interest rates mean businesses and households are less inclined to leave their money in the bank, while at the same time more likely to borrow to spend and invest. This theoretically boosts economic activity and eventually pushes up prices.

Japan has suffered from years of deflation and Tokyo's efforts to pump up the economy have had limited results so far.

While falling prices, or deflation, might appear to be good for consumers, if they become entrenched buyers could delay purchases in the hope of even lower prices later. That in turn prompts companies to hold off investment.

Deflation is a trap that is very difficult to get out of, as demonstrated by the case of the Japanese economy, which has fought it off and on for two decades.

AFP