Negative interest rates are counterintuitive and a difficult concept to comprehend, as evidenced by the Jan. 31 Economy & Business article “U.S. stocks on the upswing after Japan’s surprise rate cut.” The article stated that the Bank of Japan cut its interest rate to minus 0.1 percent, “effectively paying banks to park their reserves at the central bank.” In fact, the opposite is true.
In a normal (positive) interest rate environment, the borrower pays the lender for the use of its money; when interest rates are negative, the lender pays the borrower. Therefore, with a negative rate in effect, the Bank of Japan is charging banks to park their reserves there. One might expect that this would discourage banks from depositing funds with the central bank, and that’s exactly the idea: The central bank wants the banks to instead use the money for business and other loans that might help stimulate the economy.
Frank P. Homburger, Alexandria