Matthews Asia – BOJ's Negative Interest Rates: Lost in Translation

When the Bank of Japan (BOJ) announced negative interest rates on January 29th, it certainly caught the market by surprise. What does a negative interest rate policy mean? And what are the implications for Japan and the rest of Asia?

First, the BOJ’s negative interest rate applies only to a portion of excess reserves in the banking system, similar to the negative tiered system of Swedish and Danish central banks. What we know from the Danish and the Swedish experience is that the banks have not passed the negative interest rates to their depositors. Given that the central bank gets a negative rate on reserves but has to still pay at least zero interest on deposits, this incentivizes the bank to...