A negative interest rate...what the heck is that?

Good morning everyone,

The weather for the next few days is looking alright. We'll see some sun, some clouds, highs around 10C and lows around 2C. Not bad for the end of January, eh?

Is anyone else confused by the BOJ decision to introduce negative interest rates? First of all, how can you earn negative interest? Interest by definition cannot be below zero, right?

Anyway, whatever you want to call it, it's happening in Japan. In a desperate attempt to stop the stock market fall and rise of the yen, the BOJ has introduced negative interest rates. Basically, banks will have to pay 'tax' of 0.1% to the BOJ if they leave too much money in reserve. In theory, it sounds like a good idea, right? It means that banks will have to consider investing their money in the stock market or making it easier for people to borrow money to reduce the amount they'll have to pay to the BOJ.

But it does come with a lot of risks-banks might engage in the purchase of stocks-any stocks-or land just to use their money and that could create a bubble and we all know what happens when we get bubbles...they burst and cause way more problems in the long run.

Also, and this one is a bit scary for me-what if the banks decide to pass on that 'tax' to us? I'm not earing any interest on my bank account as it is, but to actually pay the banks a percentage to let them keep my money doesn't make any sense. Does that mean that they'll pay me to borrow money? Because if so, I'll be happy to borrow some money from them! Ha ha!

It's a really complex process, but as far as my small, simple brain can understand, the risks far outweigh the benefits and I'm not at all confident that it's the right move for the economy. The world economy is very unstable at the moment and PM Abe is having trouble meeting his inflation targets, but it's not all his fault. But trying to force inflation through very risky means, is a dangerous path to go down. It'd be better to just admit that the world economy has made it difficult to meet the inflation target for this year and wait until things settle down on the international market before trying any other stimulus measures.

That's my five cents worth...it'd only 4.9 cents if I left it in the bank...ha ha!

Have a great day!

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