Negative interest rates could be the biggest cultural export from continental Europe since David Guetta. The Bank of Canada embraced the fad in December when it reset its foreseeable zero lower bound rate to negative 0.5 percent from 0.25 percent. Canada’s central bank hasn’t actually gone there yet. Governor Stephen Poloz left the policy rate at 0.5 percent earlier this month. But fashion-forward Japan showed no such reservations. On Jan. 29, the Bank of Japan took the plunge, setting a rate of minus 0.1 percent on new reserves private lenders stash at the central bank in excess of their regulatory requirements.
Japanese bond yields dropped to record lows, the stock market rose, and the yen fell almost 2 percent against the U.S. dollar. The surprise decision was contentious. Four of the nine members of the Bank of Japan’s policy committee opposed the move. Governor Haruhiko Kuroda was among the supporters, however, re-enforcing the seriousness with which he takes his quest to end Japan’s long struggle with deflation. Ultra-low interest rates should push savers into riskier investments and keep downward pressure on the value of the yen. Theoretically, economic growth and faster inflation will follow.
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