Tokyo, February 16

The Bank of Japan (BoJ)'s negative interest rates came into effect today in a radical plan already deemed a failure by financial markets, highlighting Tokyo's lack of options to spur growth as global markets sputter.

The central bank, which announced the shock decision on January 29, will charge banks 0.1 per cent for parking additional reserves with the BoJ to encourage banks to lend and prompt businesses and savers to spend and invest.

While the announcement briefly drove down the yen and buoyed Japanese share prices, markets quickly went into reverse.

"It's getting clearer that Abenomics is a paper tiger," said Seiya Nakajima, chief economist at Office Niwa, a consultancy, referring to Prime Minister Shinzo Abe's policy mix of monetary easing, spending and reform.

"The impact of monetary easing is similar to currency intervention. The first time they do it, there’s a huge impact. But as they repeat it, the impact will wane," said Nakajima.

Though senior BoJ officials expected only a minor impact on Japanese banks, their stock prices plunged, contributing to a global market sell-off.

The problem was partly bad timing, as global markets were already in a tailspin over China’s slowdown, US rate hikes and tumbling oil prices. But the reaction leaves BoJ Governor Haruhiko Kuroda’s assertion that his policy is having its intended effects looking threadbare.

"It seems as though the BoJ's action triggered the market moves," said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management. "But a better explanation would be that concerns elsewhere overwhelmed the BoJ action."

In the 11 days since the BoJ board's announcement, the benchmark Nikkei index has fallen 8.5 per cent, despite a sharp rebound on Monday, while the yen has climbed 6.5 per cent against the dollar.

Japanese bank shares have slumped by as much as 30 per cent as they are unlikely to pass on negative rates to savers, who already get negligible interest on their deposits but would baulk at paying to save. Negative rates could push down bank operating profits by eight to 15 per cent, Standard and Poor's said.

Economists at Mitsubishi UFJ Morgan Stanley Securities said any economic benefit from negative rates might be smaller in Japan than they would be in Europe.

"Japanese banks rely for 80 per cent of funding on deposits, unlike European banks, which raise more funds from markets, suggesting their margin is likely to be pressured more," they said.