BOJ surprises global markets with a stunning move to negative interest rates. You read that correctly negative interest rates. Effective the BOJ will charge interest to all banks who have deposits. BOJ is really committed to hitting its 2% inflation target. This is truly unprecedented move. BOJ hopes banks will lend to corporations. However Japan as been in the deflation for 25 years. Corporations have no interest in borrowing money because they may seen no investment opportunity. However the Dow Jones Industrial Average shot up 300 points or 1.8% on the news.
Here are some of the risks associated with negative interest rates:
- Banks will unlikely to make loans if they have to pay borrowers.
- Depositors will be charge a fee effectively causing a drop in wealth.
- Possible bank runs due to depositors withdrawing their savings in order to preserve their nominal wealth.
- Keeping money under the mattress effective has new risks such as its being stolen, lost, destroyed or damaged
- It will end safe havens for risk free investments
- Home currency in this case the Yen will drop in value there decreasing purchasing power on imports
Below are some links to help explain the impacts of negative interest rates.
http://www.bloomberg.com/news/videos/2016-01-29/negative-interest-rates-a-risky-move-for-the-boj-
http://www.economist.com/blogs/economist-explains/2015/02/economist-explains-15
http://www.theguardian.com/business/2014/jun/05/negative-interest-rates-european-central-bank
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