Feb 01, 2016 04:10 PM EST

Japan Introduces Negative Interest Rate To Boost Economy

The Bank of Japan has surprised stock market investors las Friday with its announcement to introduce a negative interest rate policy.

The bank is said to "charge lenders that leave too much cash on idle deposit with it" as part of its steps to shore up a stumbling economic recovery.

This move has clearly surprised stock market investors. The news even caused the "Nikkei 225 index swinging between gains and losses after the announcement". The Japanese yen slid, on the other hand, with the "U.S. dollar rising to about 120.70 yen from about 118.50 earlier in the day."

The central bank has announced further that it is implementing a 0.1 percent fee on several new commercial bank deposits with the BOJ, effectively a negative interest rate. The move is central bank's attempt to encourage commercial banks to be able to lend more to investors, rather than keeping cash at the BOJ. With this move, it hopes to stimulate investment and growth in the world's third-largest economy.

The BOJ said in statement that "Japan's economy is still recovering, but risks from volatile global financial markets could undermine confidence and slow progress toward the central bank's 2 percent inflation target."

As explained, the bank deposits that are directly related with the BOJ will have three tiers. First, the existing current account balances will now earn a 0.1 percent positive interest rate. Second, required reserves that are held at the central bank by financial institutions will have zero interest. Third, any additional current account deposits would now incur the minus 0.1 percent rate. The bank "will cut the interest rate further into negative territory if judged as necessary."

This new policy will be in effect for as long as needed in order to achieve its inflation target. BOJ is hoping to achieve their goal by mid-2017.

"We think there is an increasing risk that an improvement in the business confidence of Japanese firms and the conversion of deflationary mindset may be delayed, and that the underlying trend in prices might be negatively affected," BOJ Gov.Haruhiko Kuroda said.

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