Japan adopts negative interest rate in surprise move

The benchmark rate of -0.1% means that the central bank will in fact charge money for holding some deposits.

It is hoped this will counter the ongoing economic slump in the world's third-largest economy.

The European Central Bank also has negative rates in a bid to keep the EU economy afloat, however, it is a first for Japan.

The decision came in a narrow 5-4 vote at the Bank of Japan's first meeting of the year on Friday.

It said in a statement that it will introduce a three-tiered system - effectively imposing a 0.1% fee on some commercial bank deposits.

"The BOJ will cut interest rates further into negative territory if judged as necessary," the Bank of Japan said, adding it would continue as long as needed to achieve an inflation target of 2%.

Why has Japan made this move?

- Japan is currently facing very low inflation, which means that people and companies tend to hold on to their money on the assumption that they can get more for it later in time. So rather than spend or invest it, they will keep it in the bank.

- Cutting the cost of borrowing is an incentive that is meant to boost both domestic spending and business investment.

- It is also aimed at driving inflation up, which is another incentive for people and businesses to spend rather than save.

Earlier in the day, fresh economic data had again highlighted concerns over economic growth. The December core inflation rate was shown to be at 0.1% - far below the central bank target.

Asian shares jumped and the yen fell across the board in reaction to the announcement. Japanese banks though saw their shares drop on the news as lenders are likely to see their margins squeezed even more.

Last resort

There are doubts, however, over how well the new policy will work.

"Negative interest rates are one of the last instruments in the BOJ's tool box," Martin Schulz of the Fujitsu Institute in Tokyo told the BBC. "But their impact is unlikely to be strong."

Mr Schulz cautioned that in the eurozone, negative interest rates are being used to tackle a financial crisis, whereas Japan is in a protracted slow growth environment.

"In Japan, credit didn't expand not because banks were unwilling to lend but because businesses didn't see the investment perspective to borrow. Even with negative interest rates, this situation will not change."

"Businesses don't need money - they need investment opportunities. And that can only be achieved by structural reforms, not by monetary policy," he said.

The decision comes in addition to the BOJ's massive asset-buying programme, which over the past years had failed to boost growth.

For more information go to BBC.com