Garrett Knight Associates says the Bank of Japan (BoJ) has become the latest in a growing list of central banks implementing negative interest rates in a bid to stimulate their economies. In joining Sweden, Switzerland, Denmark and the European Central Bank in taking its deposit rate into negative territory, the BoJ has fired the latest salvo in a prolonged but oh-so-polite currency war.

The announcement took markets completely by surprise given that, not ten days earlier, the BoJ’s Governor, Haruhiko Kuroda had told the Japanese Parliament that he was not seriously considering introducing negative interest rates.

“The whole idea behind negative rates is to, apparently, force commercial banks to pay to keep their reserves on deposit at the central bank where, up until now, they have earned interest for doing so. The negative rate effectively levies a charge on them for parking their money and encourages them to seek a better return on their capital by lending to businesses and consumers,” noted chief economist at Garrett Knight Associates, Yuri Abe.

The BoJ’s efforts to reinvigorate Japan’s economy have included record quantitative easing programs and the world’s longest-running zero interest rate policy (ZIRP). Despite this, growth is anemic while inflation remains stubbornly below the central bank’s target and the country’s other problems, particularly those related to national debt continue to worsen.

Despite the headwinds facing the Japanese economy, Garrett Knight Associates says it is bullish on the country’s stock market despite sharp falls on the Nikkei 225 in recent days. “The BoJ isn’t done with quantitative easing just yet. There is every likelihood that they will increase the quantity of assets they buy every month and this will feed into a rally in equities,” said Abe.

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