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Negative Interest Rates Arrive
The BBC [bbc.com] is reporting that The Bank of Japan has officially introduced a negative interest rate. That's right, the central bank will charge commercial banks 0.1% on some of their deposits. The European Central Bank also has negative rates, however, it is a first for Japan.
The idea is to force commercial holders of large cash deposits to put their money to work, to counter the ongoing economic slump in the world's third-largest economy. Money sitting in the bank does no one any good.
Not everyone is convinced it will work, it hasn't worked in the EU, to any measurable effect, and it may just drive large cash holders to take their money off shore.
Why has Japan made this move?
- Japan is currently facing very low inflation, which means that people and companies tend to hold on to their money on the assumption that they can get more for it later in time. So rather than spend or invest it, they will keep it in the bank.
- Charging a percentage to keep money in the central bank might encourage commercial banks to lend it out. That would boost both domestic spending and business investment.
- It is also aimed at driving inflation up, which is another incentive for people and businesses to spend rather than save.
Most of the depositors getting charged, rather than paid, to keep funds in the central banks are smaller banks, and large corporations. The banks can lend their funds, for low, but not zero, interest. But large corporate depositors really have little incentive to spend their money until the economy picks up, and will probably seek interest overseas.
Where would you put your funds if banks started charging you keep your money safe?
