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 Global equities jumped, the yen tumbled and sovereign bonds rallied
after the BOJ said it would charge for a portion of bank reserves
parked with the institution, an aggressive policy pioneered by the
European Central Bank (ECB).
"What's important is to show people that the BOJ is strongly
committed to achieving 2 percent inflation and that it will do
whatever it takes to achieve it," BOJ Governor Haruhiko Kuroda told
a news conference after the decision.
In adopting negative interest rates Japan is reaching for a new
weapon in its long battle against deflation, which since the 1990s
have discouraged consumers from buying big because they expect
prices to fall further. Deflation is seen as the root of two decades
of economic malaise.
Kuroda said the world's third-biggest economy was recovering
moderately and the underlying price trend was rising steadily.
"But there's a risk recent further falls in oil prices, uncertainty
over emerging economies, including China, and global market
instability could hurt business confidence and delay the eradication
of people's deflationary mindset," he said.
"The BOJ decided to adopt negative interest rates ... to forestall
such risks from materializing."
Kuroda said as recently as last week he was not thinking of adopting
a negative interest rate policy for now, telling parliament that
further easing would likely take the form of an expansion of its
massive asset-buying program.
But, with consumer inflation just 0.1 percent in the year to
December despite three years of aggressive money-printing, the BOJ's
policy board decided in a narrow 5-4 vote to charge a 0.1 percent
interest on a portion of current account deposits that financial
institutions hold with it.
The central bank said in a statement announcing the decision it
would cut interest rates further into negative territory if
necessary, in its battle against deflation.
"Kuroda had been saying that he didn't think something like this
would help so it is a bit surprising and it's clear the market has
been surprised by it," said Nicholas Smith, a strategist at CLSA
based in Tokyo.
Some economists doubted the BOJ move would prove effective.
"It has gone on the defensive," said Hideo Kumano, chief economist
at Dai-ichi Life Research Institute. "It made this decision not
because it's effective, but because markets are collapsing and it
feels it has no other option."
GOING NEGATIVE
Several European central banks have cut key rates below zero, and
the ECB became the first major central bank to do so in June 2014.
In pursuing the same path, the BOJ is hoping banks will step up
lending to support activity in the real economy, rather than pay a
penalty to deposit excess cash at the central bank.
There is little sign of any pent-up demand from Japanese banks or
cash-rich companies for fresh funds, however, and any money released
into the system may merely be hoarded or steered into speculative
activity.
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"This is an aggressive all-stick-no-carrot approach to spurring
investment," said Martin King, co-managing director at Tyton Capital
Advisors in Tokyo.
The BOJ maintained its pledge to expand base money at an annual pace
of 80 trillion yen ($675 billion) via aggressive purchases of
Japanese government bonds (JGBs) and risky assets conducted under
its quantitative and qualitative easing (QQE) program.
The BOJ's move - boosting the dollar by 1.7 percent against the yen
- could make it even harder for the U.S. Federal Reserve to raise
interest rates four times this year, as originally envisaged by its
policy board.
"REGIME CHANGE"
Markets have been split on whether Japan's central bank would ease
policy as slumping oil costs and soft consumer spending have ground
inflation to a halt, knocking price growth further away from the
BOJ's ambitious 2 percent target.
This is the fourth time the BOJ has pushed back its time frame for
hitting its inflation target - from an initial goal of around March
2015.
Friday's surprise interest rate decision came in the wake of data
that showed household spending and output slumped in December,
underscoring the fragile nature of Japan's recovery.
Many analysts had already been suggesting that the BOJ had little
scope left to expand its asset-buying program.
"I think this is a regime change and the BOJ's main policy tool is
now negative interest rates," said Daiju Aoki, an economist at UBS
Securities in Tokyo. "This shows that the ability to buy more JGBs
is limited."
Kuroda said the BOJ was not running out of policy ammunition.
"Today's steps don't mean that we've reached limits to our JGB
buying," he said. "We added interest rates as a new easing tool to
our existing QQE framework."
(Additional reporting by Stanley White, Tetsushi Kajimoto, Kaori
Kaneko and Joshua Hunt; Writing by Alex Richardson; Editing by Eric
Meijer and Jacqueline Wong)
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