The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to stimulate the economy as volatile markets and slowing global growth threaten its efforts to overcome deflation.
Global equities jumped, the yen tumbled and sovereign bonds rallied after the BOJ said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB).
"What's important is to show people that the BOJ is strongly committed to achieving 2 percent inflation and that it will do whatever it takes to achieve it," BOJ Governor Haruhiko Kuroda told a news conference after the decision.
In adopting negative interest rates Japan is reaching for a new weapon in its long battle against deflation, which since the 1990s have discouraged consumers from buying big because they expect prices to fall further. Deflation is seen as the root of two decades of economic malaise.
Kuroda said the world's third-biggest economy was recovering moderately and the underlying price trend was rising steadily.
"But there's a risk recent 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," he said.
"The BOJ decided to adopt negative interest rates ... to forestall such risks from materializing."
Kuroda said as recently as last week he was not thinking of adopting a negative interest rate policy for now, telling parliament that further easing would likely take the form of an expansion of its massive asset-buying program.
But, with consumer inflation just 0.1 percent in the year to December despite three years of aggressive money-printing, the BOJ's policy board decided in a narrow 5-4 vote to charge a 0.1 percent interest on a portion of current account deposits that financial institutions hold with it.
The central bank said in a statement announcing the decision it would cut interest rates further into negative territory if necessary, in its battle against deflation.
"Kuroda had been saying that he didn't think something like this would help so it is a bit surprising and it's clear the market has been surprised by it," said Nicholas Smith, a strategist at CLSA based in Tokyo.