The world was shocked on Friday 29 January 2016 when the Bank of Japan announced its decision to implement negative interest rates for the first time in its history. Equity markets soared and the yen was sold heavily against the USD as markets digested the news and the implications that this stimulus would have on the Japanese economy.
The decision was to implement a three-tiered system whereby only the top-tier of excess deposits placed with the central bank would be hit with negative interest rates thus coercing the banks to lend money rather than hoard it. The chart below released by Westpac shows that this is, in reality, affects only a small percentage of deposits, around JPY10 trillion out of a total deposit base of JPY260 trillion. While the bulk of central bank deposits only earn 0.1% or even 0.0%, only a small amount will pay the central bank to hold their money. The central bank move was thus largely symbolic but appeared to push the right buttons for markets.