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Bank of Japan on Friday joined European central banks by introducing negative interest rates - that is, charging, not paying, for deposits.

Yuan Vs. Yen: How China Figures Into Japan’s Negative Rates?

Japan’s move to negative interest rates is the latest step in a dangerous dance between the world’s second and third largest economies.
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The problem is currencies. China’s moves to bring down the value of the yuan have rattled markets this year, sparking a flight from risky assets that has sent investors into safer havens like the yen.

The stronger yen in turn has threatened to tip Japan’s economy back into deflation, which the central bank has struggled to vanquish. The rising yen has also put more pressure on corporate profits and helped push Japanese stocks into bear market territory last week.

So when the Bank of Japan announced its plan to lower interest rates below zero for the first time Friday, it makes sense that Governor Haruhiko Kuroda named just one country among the risks facing its economy — China.

Now it’s China’s turn to sweat. The yen fell as much as 2.1% after the announcement, which will make Chinese exports more expensive relative to Japanese products.

The two countries, and most of their neighbors, are struggling against a tide of money outflows and weak trade. While governments in the rest of Asia have far more room to stimulate their economies than Japan does, a decline in the yen could spur them to try to push down their own currencies.

Were China to follow–and the central bank has already allowed the yuan to fall–it would ignite another round of fear, which could push up the yen and force the Bank of Japan to act again.

So far, the yen’s ups and downs have left it about where it was a year ago, so the risk of a cycle of competitive devaluation is limited. In addition, the drop in the yen would have been a bigger problem for China when the yuan was pegged to the dollar. The government’s recent switch to a basket of currencies that includes the yen means the move up won’t be as big. But it still will push the currency in the wrong direction for the slowing economy.

There’s another reason China doesn’t want the yen to fall. Right now, thousands of Chinese are planning their Lunar New Year’s holidays in Japan early next month, hoping to take advantage of the cheap yen. During the October Golden Week, China’s other big travel week of the year, Chinese tourists descended on Japan, spending more than $830 million on shopping, according to the state-run China Daily.

China is suffering an epic capital flight in which hundreds of billions of dollars are leaving the country. A weaker yen will send more Chinese into Tokyo’s department stores and further drain China’s currency reserves.

The economic fates of China and Japan are closely connected. Until their economies get on stronger footing, moves to boost growth in one country could hurt the other and risk retaliation.

As the world economy stays weak, the interaction between China and Japan could play an increasingly important role both in Asia and globally.

http://blogs.wsj.com/moneybeat/2016/01/29/yuan-vs-yen-how-china-figures-into-japans-negative-rates%E2%80%8B/