The Bank of Japan (BOJ) on Jan. 29 announced plans to introduce a negative interest rate to demonstrate its strong commitment to achieving a 2 percent inflation target.
The central bank took the initiative after concluding that it would be difficult to attain its objective at an early date by simply focusing on monetary volume through massive purchases of government bonds.
The BOJ maintains that its ''qualitative and quantitative monetary easing'' policy has produced results. Its decision to add interest rates to that policy reflects the central bank's plan to implement a flexible monetary policy.
In its new outlook report, the BOJ aims to achieve its inflation target in more than four years, instead of an initial objective of around two years. It says it is difficult to attribute the difficulty in achieving the 2 percent target to oil price declines. The BOJ was under pressure to further strengthen its monetary policy.
Financial markets have experienced confusion due to the Chinese economic slowdown and falling crude oil prices since the start of this year. If the BOJ had failed to take additional monetary easing measures, its resolve to achieve its 2 percent inflation target would have been questioned, and it would have faced the disappointment of its monetary policy having reached its limits.
The BOJ thus was under pressure to implement a new set of monetary easing steps to surprise markets and renew its strong will to achieve a 2 percent inflation target.