The Bank of Japan (BoJ) looks geared to ramp up its reputation for out-of-the-box thinking when it meets later this week, unveiling an extra bout of monetary easing which could lead to it paying banks to borrow money.
Japan's fight with deflation has been notorious. In 10 of the last 20 years prices have actually gone down instead of up. When Shinzo Abe came to power at the end of 2012, he launched his Abenomics programme to finally try and bust Japan out of its funk.
Global forces, however, caught up with him. Now Japan is not alone in its battle to try and get prices heading in the right direction as sharp oil price slides have led to inflation plunging across the developed world.
Like other central banks, the BoJ has been tasked with taking a leading role in this fight. But quantitative easing (QE) and low interest rates are yesterday's game for an organisation so experienced in battling low prices. Its first round of QE, which lasted from 2001-2006 became the model the US Federal Reserve and Bank of England looked at in the depths of the financial crisis before they embarked on their own programmes.
Earlier this year, the BoJ followed the lead of the European Central Bank (ECB) and went negative – cutting its headline interest rate to minus 0.1 per cent. As the BoJ gears up for a crucial monetary policy meeting later this week, analysts suggest it could be about to fire all its guns at once with not one but three policy shifts:
Lower interest rates – The BoJ is tipped to cut rates to at least minus 0.2 per cent by half of economists polled by Bloomberg.
More QE – Japan's central bank is currently pumping 80 trillion yen (£490bn) a year into the economy through its bond-buying programme. In a meeting earlier this year, some BoJ officials considered increasing that to "100 trillion yen or more".
Pay to borrow – The BoJ could go into negative territory in the interest rates it offers banks to borrow from it. At the moment, banks can borrow free (at a rate of zero per cent interest) from the BoJ. But the so-called Simulated Bank Lending Facility could be cut to minus 0.1 per cent – effectively paying banks to borrow.
Not only would such a measure encourage banks to lend, but as Sean Yakota, head of Asia strategy at SEB said, it would also "improve banks' net interest margins" – denting some of the adverse effects of negative interest rates on banks' profitability.
What the analysts say
Analysts are widely expecting at least one – if not more – of the three measures to be announced when the BoJ meets on Thursday.
“With the two per cent inflation target for the Japanese economy now far out of reach, the Bank of Japan (BoJ) may find its hand forced to implement additional measures at this week’s monetary policy meeting,” said Katsunori Kitakura, lead strategist at Japan's largest asset manager, Sumi Trust.
Takuji Aida at Societe Generale said there was a 30 per cent chance the BoJ would cut interest rates further by the end of 2016.
On the idea of being paid to borrow, Aida said: "As a supplementary measure, the BoJ may decide to apply a negative interest rate on loans, which are currently offered at a zero per cent. This would reduce the concern that the BoJ's negative interest rate policy will have a negative impact on the financial institutions' revenues and profits."
Read more: Has Abenomics failed?
However, some issued warnings about the effectiveness of future policy moves.
"Although the idea of being paid to borrow money is quite pleasant, this dangerous move signals diminishing returns of monetary policy with desperation kicking in as ammunition runs dangerously low," said FXTM research analyst Lukman Otunuga.