Japan to apply negative interest rates, news lifts Indian markets

Tokyo/Mumbai, Jan 29 (IANS) The Bank of Japan (BOJ) said on Friday, after a two-day policy board meeting, that it would introduce negative interest rates from next month, an announcement which played a part in buoying Indian equity markets later in the day.

The decision came to encourage more lending and business spending amid projections that the Japanese central bank will not achieve its two percent inflation goal as oil prices slide and a global economic downturn threatens to further impact spending, Xinhua reported.
The BOJ surprised markets in Tokyo by saying it plans to introduce a negative interest rate from February 16 as falling oil prices have hampered the bank’s reflationary efforts.
In Mumbai, a barometer index of the Indian equity markets provisionally closed the day’s trade up 401 points.
Initially, both the Indian bellwether indices opened on a positive note, in sync with their Asian peers, on the back of firm crude oil prices and BoJ’s decision to maintain its stimulus programme.
The Japanese central bank move is aimed at pro-actively defending against the global economic malaise denting business sentiment there.
Bank of Japan Governor Haruhiko Kuroda has maintained he plans to eliminate the “deflationary mindset” in Japan, particularly regarding business spending and private consumption, which account for around 60 percent of Japan’s GDP.
BoJ voted to apply a negative interest rate of minus 0.1 percent to current accounts held by financial institutions, in a narrow 5-4 vote by its policy board members.
The board also decided the bank will further cut the interest rate below minus “as deemed necessary”.
Its decision follows a raft of economic data released by the government on Friday morning that missed market expectations, sparking concerns for the outlook of the world’s third-largest economy.
The rate cut, however, immediately sent the benchmark Nikkei stock index shooting up three percent, and saw the yen retreat around two percent versus its US counterpart.
Indian investors were seen hopeful of an interest rate cut by the Reserve Bank of India during the upcoming monetary policy review slated for February 2, which expectations were backed up by BoJ’s decision to go in for a negative interest rate to support the Japanese economy.
BoJ’s decision came a day after the US Fed maintained status quo on key lending rates.
Besides, strengthening of rupee’s value soothed investors’ nerves. The rupee opened at 68.12 against a US dollar from Thursday’s close at 68.23.
“Rupee had opened slightly stronger around 68.12 and then went on to strengthen more, on the back of easing from BoJ,” Anindya Banerjee, associate vice president for currency derivatives with Kotak Securities, told IANS.
“BOJ lowered rates to negative zone and that triggered the reflexive risk on trade in the world financial markets,” he said.