The central bank has imposed a 0.1% fee on deposits in an attempt to force more borrowing as way out of the deflationary spiral

Japan’s central bank has made a shock decision to adopt negative interest rates, in an attempt to protect the flagging economy from market volatility and fears over the global economy.

In a 5-4 vote, the bank’s board imposed a 0.1% fee on deposits left with the Bank of Japan (BoJ) – in effect a negative interest rate.

The move, which follows the similarly aggressive precedent set by the European Central Bank in June 2014, is designed to encourage commercial banks to use excess reserves they keep with the central bank to lend to businesses.

The surprise decision came just days after the bank’s governor, Haruhiko Kuroda, suggested he had dismissed any drastic easing measures to boost business confidence.

On Friday, the bank said it had not ruled out a further cut. “The BoJ will cut the interest rate further into negative territory if judged as necessary,” it said in a statement.

It said the move was intended to lessen the risk to Japanese business confidence from turbulence in the global economy, a week after data showed the Chinese economy had grown at its slowest pace for a quarter of a century in 2015.

Some BoJ board members are reported to have voiced concern that slumping Tokyo stocks could threaten attempts to get firms to boost capital expenditure.

The shift to negative interest rates – which in effect “taxes” financial institutions for parking excess reserves with the BoJ – is seen as an attempt to drag Japan out of its deflationary mindset.

Policymakers have been trying to achieve that through qualitative and quantitative easing, under which the BoJ expands its monetary base through the aggressive purchase of Japanese government bonds and risky assets.

But with so few assets let to buy, that policy appears to have run its course, according to some analysts. “I think this is a regime change and the BoJ’s main policy tool is now negative interest rates,” said Daiju Aoki, an economist at UBS Securities in Tokyo. “This shows that the ability to buy more Japanese government bonds is limited.”

The decision took some analysts by surprise. “Kuroda had been saying that he didn’t think something like this would help so it is a bit surprising and it’s clear the market has been surprised by it,” said Nicholas Smith, a strategist at CLSA based in Tokyo.

“The banking sector is getting smoked right now, though everything else seems to be doing just fine. This has obviously had a big effect on inflation and on inflation expectations.”

Markets had been divided on whether the central bank would opt for more stimulus as slumping oil costs and soft consumer spending have ground inflation to a halt in the world’s third biggest economy.

Earlier on Friday, official data showed Japan’s inflation rate came in at 0.5% in 2015, way below the BoJ’s 2.0% target, as the government struggles to convince cautious firms to usher in big wage hikes to stir spending and drive up prices.

“The 2% target is now totally out of reach,” said Taro Saito, economist at NLI Research Institute.

The bank extended the deadline for achieving its 2% inflation target to the first half of fiscal 2017 from its previous estimate of the second half of fiscal 2016.

Other data published on Friday pointed to a weak economy with spending by households in December falling 4.4% from a year ago and monthly industrial production contracting 1.4%.

The BoJ cut its core consumer inflation forecast for the coming fiscal year beginning in April to 0.8% from 1.4% projected three months ago.

The authorities will be hoping negative interest rates encourage commercial banks to lend more to promote investment and growth.

The rate cut had an immediate knock-on effect, sending shares on the Nikkei average up by more than 500 points early on Friday afternoon. However, shares soon plunged back down again as traders digested the broader implications of the move, which forced down the value of the yen and which could spark a currency war.

“The fact markets pared back this bounce soon after the announcement may in some respects reflect growing market concern that central banks are delving into a tit-for-tat currency devaluation war,” said Angus Nicholson at the online trading firm IG in Melbourne.

“And the grand macro-economic elephant in the room is what happens if China is forced into a major one-off devaluation in retaliation. Markets are unlikely to react well to a big yuan devaluation, and the further the ECB and the BoJ force their currencies down the more they push China to act.”

The decision came a day after the prime minister, Shinzo Abe, lost one of the key architects of his inflation-oriented economic policy, known as “Abenomics”. Akira Amari was forced to resign as economy minister on Thursday following allegations that he and his aides received bribes from a construction company. Amari has denied any wrongdoing.

Jesper Koll, chief executive officer at WisdomTree Japan, applauded the BoJ’s decision. “I’m very happy with governor Kuroda’s leadership today – adopting negative rates is exactly what was needed to re-assert the relentless, pro-active and pro-growth determination that underlies Abenomics,” he said.

“The fact that Kuroda has gone out on a limb – with a 5-4 vote – reasserts that this is his BoJ, not the technocratic non-risk taking BoJ of the past. As we keep insisting, this is not a business-as-usual leadership team.