Bank of Japan shocks markets by adopting negative interest rates

[muriel_volestrangler]

Source: The Guardian

Japan’s central bank has made a shock decision to adopt negative interest rates, in an attempt to protect the flagging economy from market volatility and fears over the global economy.

In a 5-4 vote, the bank’s board imposed a 0.1% fee on deposits left with the Bank of Japan (BoJ) – in effect a negative interest rate.

The move, which follows the similarly aggressive precedent set by the European Central Bank in June 2014, is designed to encourage commercial banks to use excess reserves they keep with the central bank to lend to businesses.

The surprise decision came just days after the bank’s governor, Haruhiko Kuroda, suggested he had dismissed any drastic easing measures to boost business confidence.


Read more: http://www.theguardian.com/world/2016/jan/29/bank-of-japan-shocks-markets-by-adopting-negative-interest-rates

[Kelvin Mace]

1. So, they want everyone to take their money out of the bank?

Sounds like a recipe for disaster.

[Randomthought]

2. to get the economy moving

Japan wants businesses to invest in expansion and job growth

[Kelvin Mace]

3. So, does this affect all accounts

of just accounts over a certain amount? It seems they risk business simply moving their money out of the country to someplace they don't have to pay to store it.

[muriel_volestrangler]

5. just accounts at the central bank belonging to financial institutions

though it presumably has a knock-on effect on other accounts, that will have a decrease in rates too.

The shift to negative interest rates – which in effect “taxes” financial institutions for parking excess reserves with the BoJ – is seen as an attempt to drag Japan out of its deflationary mindset.

The benchmark rate of -0.1% means that commercial banks will be charged by the central bank for some deposits.

It is designed to encourage them to use their reserves to lend to businesses in an attempt to counter Japan's economic stagnation.

The charge does not directly apply to ordinary customers' accounts.

http://www.bbc.co.uk/news/business-35436187

[Kelvin Mace]

12. Thanks.

But I don't see what would stop a company from moving the money out of the country to another bank, unless they have currency controls in place.

[Randomthought]

6. Tiered

It appears to be tiered by amount of deposit between positive, zero or negative interest. I'm not a financial person but it just happen that I was reading about it.

[Gregorian]

4. Doesn't this already exist elsewhere, like London?

Max Keiser has been talking about negative interest rates for the last three years or so.

It's more shifting of wealth from us to the rich. They just take pennies from a few billion accounts. It adds up.

[muriel_volestrangler]

7. Not, as far as I know, in London, but isnsome other European countries

(certainly the central Bank of England rate is still positive, though at its historic low).

Directly, it's not a shift of wealth to the rich - this is telling the rich (ie financial institutions) that they'll have to pay to store money in the safety of the central bank. In reaction, those banks may then lower the rates they pay their own depositors, but they could have tried that before - they just might have found people took their money out of that bank. The idea is to encourage people to 'invest' their money in some scheme that doesn't involve it just sitting overnight in a bank.

[Thav]

8. It's not people - but the banks

The idea is to encourage the banks to lend out the massive piles of cash they have, rather than storing it all at the central bank and doing nothing with it.

If the interest rate is above or at 0, banks and stash their cash in the central bank and let it sit, as there's no risk there. If the economy is slowing down, they'll want to take the safe route and hold on to their mountains of cash. When that happens, the economy slows down much quicker as businesses that want to expand can't get the capital they need, causing more slowdown, causing other businesses (supply, construction etc) to also slow down.

The negative interest rate tells banks that they will lose money if they store their cash in the central bank, giving them more incentive to do something other than sitting on it.

[GummyBearz]

9. I'm wondering though

If the banks try to pass on this holding penalty to depositors, will depositors start withdrawing? I sure would, as I would rather pay for a good safe in my house than pay a bank every month. It could create a modern day run on the banks and result in catastrophe ala 1929. Which is why I would (try to) get my money out asap. Maybe the banks are smart enough not to try penalizing their depositors... but then again they weren't smart enough to know that loaning $700K to someone with no documented income and zero down was risky. Greed seems to trump logic in their business

[Thav]

10. Banks have so many schemes

And deposit account interest rates are the least of their worries. Most banks give a paltry amount of interest on savings accounts - if you get 1% you're incredibly lucky. The average rate (as of like october, 2015) for savings accounts is 0.06%. Basically there's nothing left to penalize. Banks have much more action with commercial paper (loans, debt) than with deposits. Plus, they can get money much cheaper from the central bank than they can from depositors, so they have no incentive to try to increase deposits.

Banks would take that $700k loan, roll it in with other stuff and sell it to someone else or do some other financial jiggery pokery with it.

Greed doesn't trump logic in that industry, greed trumps ethics and integrity.

[GummyBearz]

11. There is more to penalize

You are right in pointing out banks pay depositors a lower rate than they borrow their money at from the central bank. So if the central bank goes to -0.1%, then commercial banks may go to -0.2% interest, effectively charging you money to keep your money with them. That scenario is what I was referring to when I said I would take my money out asap. And if other people think the same, well, the banks don't have enough cash money in their vaults to return it to every single depositor, which creates the run, panic, and nightmare scenario.