Negative Interest Rate by Japan

Negative Interest Rate, A Bold Move.

The realm of finance is a shaky one for sure. Decisions made by giant financial institutions determine how likely a country’s economy will rise or fall. We are all aware of the dramatic recession that hit the entire world in 2008, one that is still in everyone’s mind. Clearly, drastic measures are being taken in order to avoid this chaotic scenario. Enters the Bank of Japan, which recently announced that it would set its interest rate below zero (-0.1%). While they are enforcing this negative interest rate policy, it will be interesting to know what could be the possible outcome of such a move.

Negative Interest Rate

Japanese Central Bank Governor, H. Kuroda

Stimulating the Economy.

The economy performs at his best when investors have the opportunity to borrow money from banks in order to build businesses or invest in other companies. However, when this flow is interrupted due to the fact that investors do not feel confident enough to borrow money from banks, the economy takes a hit. Therefore recession becomes a way of life for the country’s economy.

Banks are making money by obtaining a fee from the Central bank where their deposit sits, at a positive interest rate of course. But when we reach the negative interest rate territory, banks now pay a fee to the central bank for their deposits, resulting in a loss situation. This compels them to allow more lending margins to businesses and corporation, thus stimulating the flow of money the economy needs to be healthy. But this is just theory, what really happens on the market can have positive and negative consequences, since when it comes to finance events are really unpredictable.

Borrowers.

Well for borrowers, it simply means this turn of events could lead to situations where banks will pay customers who borrow money from them, leading then to a massive borrowing spree thanks to the negative interest rate!

Response.

Markets worldwide responded well to this news, the Yen fell to the US dollar, making Japanese goods sell abroad at a competitive price. Furthermore the country stocks rose to 2.8%.

We are hoping this new Negative Interest Rate measure adopted by the Japanese Central Bank will have a long term positive impact in the country’s economy, which has been trapped in a recession pattern for quite a long time now.

 

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