The Bank of Japan blindsided global financial markets Friday by adopting negative interest rates for the first time ever, buckling under pressure to revive growth in the world's third-largest economy.
In a move that was signaled by the Nikkei business daily minutes ahead of the decision, the BOJ said it will apply a rate of negative 0.1 percent to excess reserves that financial institutional place at the bank, effective February 16.
Charging banks for the privilege of parking some of their excess funds was an unexpected move, although not without precedent. Central banks in Europe, notably the European Central Bank, have slashed interest rates below zero before to push down borrowing costs and prod banks to lend more.
The BOJ left its program to buy government bonds and exchange traded funds (ETFs) unchanged.
The central bank noted that the Japanese economy has recovered modestly with underlying inflation picking up, along with spending by companies and households.
"Recently, however, global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy," the BOJ said in a statement accompanying the decision.
"For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected."