The surprise decision by the Bank of Japan to implement a negative interest rate once again puts the spotlight on this unconventional monetary policy tool.
The Bank of Japan now joins the European Central Bank, the Swedish Central Bank, the Danish Central Bank and the Swiss National Bank among the ranks of major central banks implementing a negative interest rate policy.
After the Bank of Japan made its move to charge banks for holding their reserves from February 16, some retail banks cut their deposit rates and the rest were expected to follow suit.
One of Japan's largest regional banks cut its one-year rate to 0.02% from 0.025% and another bank halved its rate to 0.025% on five-year deposits.
Standard & Poor's released an article this week called "Negative interest rates: Why Central banks can defy Time Preference''.
The paper looks at what a negative interest policy is and how it works.
Under negative interest rates, financial institutions pay interest to central banks on the liabilities (cash) the central banks issues to them.
S&P chief global economist Paul Sheard said central banks could do that because they got to determine the total amount of liabilities they issued, giving them the ability to set both quantity and price.
"In the real economy, borrowers can't usually force lenders to lend to them. Time preference and the option of holding cash means lenders will not normally accept a negative interest rate.''
Negative interest rate policy appeared to be able to exert downward pressure on the whole yield curve through the portfolio rebalance effect, as security prices, perturbed by the central banks' fixing of one price, adjusted to restore equilibrium.
The Bank of Japan's decision was a landmark one in central bank history, he said.
The bank had come to negative interest policy very late, after experimenting with all manner of unconventional policies - which made its arrival all the more significant.
"At first glance, the Bank of Japan's negative interest rate scheme is quite complicated. But it is quite cleverly constructed.''
The bank was putting store in the fact it was only at the margin negative interest rates needed to operate in to have a broader financial market easing effect.
Patience and persistence by the bank was likely to pay off, Mr Sheard said.
Central bank governor Haruhiko Kuroda aims to break the deflationary mind-set that has blighted Japan for decades and get the economy moving.
But his compatriots are compulsive savers.
More than half of the $US14trillion ($NZ20.8trillion) in Japanese households' financial assets are either bank deposits or cash, compared with only 13.7% for the United States and 34.4% for the euro zone.
S&P Ratings Japan director Ryoji Yoshizawa does not think the cuts will change that.
"Interest rates are already very low so further cuts are not likely to have much impact on depositors.''
Deutsche Securities banking analyst Yoshinobu Yamada said in a note to clients there had been attempts in the past by banks to introduce charges on deposits, but they failed due to the backlash from retail and corporate clients.
However, some are already at or near the tipping point, Reuters reported.
"There is no point in depositing money,'' Kiyoshi Ishii (72), the worried owner of a shop selling rice crackers in Sugamo, said.
"There's no other way than to keep money under the mattress.''
