The Bank of Japan announced on Friday that it would adopt a policy of negative interest rates. The announcement came as a surprise given that last week Reuters reported that the central bank's Governor Mr Haruhiko Kuroda said he was not considering negative interest rates.
The central bank stated that it would continue this policy for "as long as it is necessary" to achieve a 2% inflation target. The bank will implement an effective negative rate by charging -.1% on deposits held from other financial institutions. The aim is to encourage commercial banks to seek a better return on these deposits by lending it to their own borrowers.
It is hoped that this will further stimulate the Japanese economy. In its statement the central bank highlighted its concerns over the recent drop in crude oil prices and slowing Chinese economy. Central banks lowering interest rates is perceived as a sign that economic growth is slowing and therefore needs to be stimulated by further lending. Negative rates may be an ominous sign of things to come given the market jitters caused by the US Federal Reserve raising their rates last month for the first time since 2006.