Japan rates go negative – US growth slows

The Bank of Japan's surprise decision to introduce negative interest rates in a bid to boost its flagging economy was welcomed by stock markets across the world.

Japan, Mount Fuji

On a day of conflicting news for many national economies – including the fact that, as expected, growth in the US economy slowed to 0.7 per cent in the final quarter of 2015 – the move by Japan's central bank means that 0.1 per cent fee will be imposed on some deposits. The bank added in a statement, "The BoJ [Bank of Japan] will cut interest rates further into negative territory if judged as necessary."

The world's third largest economy has been stagnating for well over a decade and Haruhiko Kuroda, the BoJ's governor, said the weakening growth rate of the global economy was the main factor behind the move.

"Japan's economy continues to recover moderately and the underlying price trend is improving steadily (but) further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset."

Although the move provided an immediate boost to global markets, analysts were sceptical about how success the negative rate could be in the long run.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said, "The Bank of Japan's move shows how twitchy policy makers are getting about faltering global growth and the potential for deflationary pressures to get out of control.

"The UK is not immune to this malaise, and indeed interest rate markets over here are now pricing in a higher probability of a cut in rates this year, than a rise.

"However there's nothing like a bit of loose monetary policy to get stock markets excited, and true to form, global indices have reacted positively to the news from Japan. Taking a step back, it seems that if throwing 80 trillion yen at the problem each year has proved insufficient, the Bank of Japan may soon find itself unscrewing the kitchen sink."

Martin Schulz, of the Fujitsu Institute in Tokyo, told the BBC, "Negative interest rates are one of the last instruments in the BoJ's tool box, but their impact is unlikely to be strong."

Mr Schulz said that while negative interest rates in the eurozone were being used to tackle a financial crisis, Japan was employing the tactic in a protracted, slow growth environment.

"In Japan, credit didn't expand not because banks were unwilling to lend but because businesses didn't see the investment perspective to borrow. Even with negative interest rates, this situation will not change," he said. "Businesses don't need money - they need investment opportunities. And that can only be achieved by structural reforms, not by monetary policy."

Meanwhile, data from the US showed a slowdown in economic growth, mainly as a result of the global slowdown, a strong dollar hampering exports and an inventory reduction by businesses.

Analysts had predicted a 0.7 per cent rate in the final three months – a sharp reduction from the two per cent growth in the previous quarter. The US Commerce Department said lower oil prices had continued to undermine investment by energy companies while unseasonably mild weather reduced consumer spending on utilities and clothing.

Over the year as a whole, US GDP growth amounted to 2.4 per cent in 2015, the same figure as the previous year. The US Federal Reserve increased interest rates in December for the first time since 2006 and said earlier this week that growth had slowed towards the end of the year, despite healthy growth in the labour market.

In Europe, preliminary figures showed that Spain's economy was continuing to bounce back with 0.8 per cent GDP in the last quarter of 2015 while France only recorded a disappointing quarterly rise of 0.2 per cent, representing 1.1 per cent growth over the year as a whole.

Julien Manceaux, economist at Capital Economics, commented, "If these figures are confirmed next month, it would mean that last year's hopes to see 2015 showing a stronger recovery of 1.5 per cent will never materialise. Worse, this is now all we can hope for in 2016.

"Indeed, 2015 had all the reasons to be better: some structural reforms, tax cuts for households and companies, a weaker euro and low energy prices should have made of 2015 the year of the recovery. But confidence never returned enough to ensure that, leaving business investments and job creations too low.

"Looking ahead, we expect the labour market to gradually stabilise and reinforce confidence in coming months, mostly because of new measures announced to the government. This means that the recovery is likely to continue to unfold in coming months, albeit at a slower pace than expected. If better labour market figures do not materialise soon, the risk is to see domestic demand faltering when temporary factors like low energy prices will see their effects abate."

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