Bank of Japan introduces a negative interest rate of -0.1%

Shares in Japan jumped today following a surprising decision from the Bank of Japan to introduce a negative interest-rate policy. The aim is to encourage bank lending and drive up inflation. The Nikkei Stock Average finished up 2.8% at 17518.3 as a result, after an oscillating session as investors tried to interpret the news. The Japanese yen initially reached its weakest against the U.S. dollar this year but was last up 1.6% at ¥120.68 to one U.S. dollar.

The gains in Japanese stocks lifted most other Asian markets by their closes. Australia’s S&P/ ASX rose 0.6%, and South Korea’s Kospi rose 0.3%. Hong Kong’s Hang Seng Index closed 2.5% higher.

Speaking about today’s developments, Sanjiv Shah, Chief Investment Officer at Sun Global Investments, said:

“The decision to introduce a negative rate may seem like a bold move by the Bank of Japan, but in reality it reflects the lack of options available to tackle the longstanding two-decade long deflationary pressures. Abenomics has really hit the limits of effective action. The only option for sustainable progress for Japan is deep structural reform under the so-called third arrow of Abenomics.

“The policies of currency devaluation and monetary stimulus have been well and truly exhausted now and there is little reason to think that negative interest rates will make any difference.”

Philippe Gelis, CEO and co-founder Kantox, said:

“While all eyes are on China and its policy of maintaining yuan stability, other central banks are arming themselves in a war to reduce their currencies. While the official objective is to boost inflation, the reality is that sinking currencies will boost the competitiveness of Japanese products. The Bank of Japan’s move, although unprecedented, follows in the footsteps of the European Central Bank, the Swiss National Bank or the Swedish Riksbank. This is close to Protectionism.

Companies operating internationally are facing a rocky market and it looks like it won’t be the last scare they will have this year. Today, with a weaker yen, European companies that sell products in Japan will see a significant profit slump.”