Bank of Japan has stunned markets and investors with a surprising decision to lower interest rates below zero in a move aimed at economic recovery.
The bank’s plan with the negative interest rates is to allow inflation back in so that it can weaken the Japanese yen against the US dollar. Though the banks intentions for the economy are good, the move evoked fear of a currency devaluation struggle between the Bank of Japan and global central banks.
Since the announcement on Friday, the currency has dropped by roughly 2% to 121.4, marking the lowest value in a one month period. The currency is expected to maintain the downward trend over a short term period. BNP Paribas expects the currency to trade at around 121 against the dollar in the next few days and should thus be dethroned from its position as the strongest funding currency in 2016.
The decision made by BOJ has caused ripple effects such as a rise in Asian shares and rallying sovereign bonds. This is after an announcement by the Japanese bank that it will tax a piece of the bank reserves stored within BOJ. The decision evokes a similar policy originally introduced by the European Central Bank. Furthermore, the Bank of Japan claims that it will lower the interest rates further if necessary.
The bank’s governor, Haruhiko Kuroda stated that Japan’s economy which is currently the third largest in the world is recovering at a reasonable rate, and the prices seem to be rising at a stable rate. However, there are still some risks and worries due to the uncertain nature of emerging economies such as China and future oil price fluctuations. These factors could disrupt the confidence in the economy.
Mr. Kuroda told the press that the bank’s decision to employ negative interest rates is a strategy to ward off those risks. The bank’s decision to institute the 0.1% interest was achieved through a vote by the bank’s policy board.