The Bank of Japan has applied negative interest rate on money hoarding with the central bank and now commercial banks deposit their money to central bank will get the negative interest on invested money. The negative interest rate set by Bank of Japan is -0.1%. This negative rate policy will spur lending and there is an expected increase up to 2% in inflation. This implementation of negative interest rate will encourage banks to lend money to the general public which will further boost the economy. Pooling money in the market will boost money circulation which will increase inflation up to two percent. This kind of productive exploitation of money will help people to get capital for their business and other projects which will further let them earn GDP for the economy.[irp]
This idea was used for the first time by European central bank (ECB) who introduced negative interest rate on money hoarding by commercial banks. It led to boasting economy activities in Europe which further led to a balanced economy. The negative interest rate has to be used as money tool for balancing money policy in Japan. Prime Minister Shinzo Abe has called it Economic revival program.
If the interest rate charged by commercial banks is lower, it will urge businesses and households to lend money from banks as they will be able to pool fund for their business activities at lower interest rates. In case return on investments made with banks is low, people will avoid hoarding their money to banks and project the funds in the economy. The whole process will boost the money circulation which leads to increase in market activity and push up in prices.
Japan has been suffering from deflation for several years which increase a prompt increase in inflation. Constant fall in prices can help consumers as they will have to spend less money on goods but there is a possibility that they buy goods with a delay while hoping further decrease in the price level. It will further lead to companies holding off the investment in production and the economy will face slow production phase. The Japanese economy has been facing deflation since last two decades but this trap has an entrenched economy so hard that constant deflation has occurred despite all efforts.[irp]
BOJ Governor Haruhiko Kuroda has been commented on this new policy of negative interest rate by stating that this new interest rate will help in recovering of deflation in prices further. There is a possibility that further decrease in prices will occur due to a decrease in oil prices which may further lead to uncertainty in economic activities. The higher risk of deflation has forced the Bank of Japan to take this step to make sure at least 2% increase in prices. The negative interest rate has been added as easing tool to the existing QQE framework.
Source: Khaleej Times