In a surprise move, the Bank of Japan has decided to introduce an interest rate of minus 0.1 percent.
The move affects current accounts held by financial institutions at the central bank, which previously offered a miniscule 0.1 percent on deposits.
“There's a risk of further falls in oil prices, uncertainty over emerging economies, including China and global market instability that could hurt business confidence and delay the eradication of people's deflationary mindset,” BOJ Governor Haruhiko Kuroda told reporters in Tokyo.
The central bankers, after their 5-4 vote Friday, issued a statement warning of deeper interest rate cuts into negative territory “if judged as necessary.”
Negative interest rates – something that sounds counterintuitive – means that financial institutions, instead of receiving money for their deposits, must pay to keep their money at the central bank. This is intended to be an incentive for the banks to lend money more freely.
“It really is a very, very strong signal. It is a penalty for the banks to just lazily give their money to the central bank rather than investing it in the real world,” said Jesper Koll, CEO of WisdomTree Japan, who praised the BOJ move.
Japan is effectively following the lead of the European Central Bank, which has already introduced negative interest rates after banks there failed to pursue higher returns through enhanced lending.
The central bank on Friday, by a vote of 8-1, left its asset purchase program unchanged at 80 trillion yen ($673 billion) a year.
The world's third-largest economy has been grappling with ways to stimulate inflation.
Consumer spending in Japan fell 4.4 percent in December from a year earlier. Government economists had hoped savings from lower oil prices would prompt households to splurge a bit.
Prime Minister Shinzo Abe for three years with his “Abenomics” policy has been trying to break Japan's deflationary cycle of weak growth and falling prices bedeviling the economy.
“The dream of Abenomics is about policy coordination. And today what we got is the central bank making it very clear that they will do their part of the bargain,” Koll told VOA.
Japan has been criticized for failing to be bold enough in restructuring the economy to prompt growth in a country where the population is shrinking and aging.
“Next we're going to need to see re-ignition, a radical policy break and leadership coming from Prime Minister Abe himself on deregulation, on privatizing and really empowering the demand of the Japanese entrepreneurs and consumers,” said Koll.
Friday's decision pushed the yield on Japanese bonds to a record low.
The yen also fell while the move set off wild gyrations for the Japanese stock indexes with investors apparently wondering whether the BOJ action will be effective.
The benchmark Nikkei 225 closed up 2.8 percent.
Other Asian stock markets mostly rose, partly in reaction to the BOJ move as well as being encouraged by China's Premier Li Keqiang reportedly telling International Monetary Fund director Christine Lagarde that Beijing has no intention of boosting exports by devaluing the renminbi.
The Shanghai Stock Exchange Composite index closed up more than 3 percent for the day Friday, but finished the week down 6 percent.
The BOJ decision came less than 24 hours after Japan's economy minister, Akira Amari, resigned due to a funding scandal.
Amari was a core member of the prime minister's economic team, as well as serving as Japan's lead negotiator for the successful formation of the Trans-Pacific Partnership trade bloc.
Amari's replacement, Nobuteru Ishihara, is a former environment minister and son of an outspoken nationalist, former Tokyo governor Shintaro Ishihara.
“I want to guide macro-economic policy to spread the benefit of Abenomics through the Japanese economy, including rural areas and small enterprises,” the new economics minister said on Friday.
The prime minister stressed on Friday that reforms would continue.
"Together with Minister Ishihara, I'd like to use my full capacity to push through structural reforms and implement our growth strategy," Abe told reporters.