Bank of Japan Drops Interest Rate to Zero Percent
The Bank of Japan took the markets by surprise today by announcing that it is effectively reducing interest rates to 0%, in an attempt to combat the strong yen which has been hurting the Japanese economy.
Together with cutting the effective rate of interest, the Japanese bank is also establishing a fund valued at around $60 billion (5 trillion yen) to be used to acquire a wide range of market assets, including everything from government securities and bonds to corporate bonds and commercial paper. In addition, it will also ultimately include securities totaling 30 trillion yen as collateral for a loan program.
The Bank of Japan recently has shown concern about the valuation of the yen compared to the U.S. dollar, and has anticipated that the rising yen may result in Japan falling deeper into the deflationary spiral it has been struggling with for nearly ten years. By reducing the rate to zero, and acquiring market assets in large quantities, Japan is striving to lessen demand for the yen, making currencies that have higher yields more attractive.
The move was a surprise for traders who were primarily anticipating a policy statement maintaining the status quo including indicators that another intervention might follow later. The policy change announced today triggered a rise in the dollar compared to the yen.
Slumping growth in exports, unanticipated drops in factory output, along with the decrease in business enthusiasm concerning the yen have all added to a rising demand that Japan’s central bank take corrective action. It remains unclear if today’s news is sufficient to slow the rise of the Japanese currency for any significant period.
