BOJ launches negative rates, already dubbed a failure by markets
TOKYO: The Bank of Japan’s negative interest rates came into effect yesterday in a radical plan already deemed a failure by financial markets, highlighting Tokyo’s lack of options to spur growth as global markets sputter.
The central bank, which announced the shock decision on Jan 29, will charge banks 0.1 per cent for parking additional reserves with the BOJ to encourage banks to lend and prompt businesses and savers to spend and invest.
Whiletheannouncementbriefly drove down the yen and buoyed Japanese share prices, markets quickly went into reverse.
“It’s getting clearer that Abenomics is a paper tiger,” said Seiya Nakajima, chief economist at Office Niwa, a consultancy, referringtoPrimeMinisterShinzo Abe’s policy mix of monetary easing, spending and reform.
“The impact of monetary easing is similar to currency intervention. The first time they do it, there’s a huge impact. But as they repeat it, the impact will wane,” said Nakajima.
Though senior BOJ officials were at pains to say they had calibrated only a minor impact on Japanese banks, their stock prices plunged, contributing to a global market sell-off, particularly in financial shares.
The problem was partly bad timing, as global markets were already in a tailspin over concerns about China’s slowdown, US rate hikes and tumbling oil prices. But the reaction leaves BOJ Governor Haruhiko Kuroda’s assertion that his policy is having its intended effects looking increasingly threadbare.
“It seems as though the BOJ’s action triggered the market
It’s getting clearer that Abenomics is a paper tiger.
Seiya Nakajima, chief economist at Office Niwa
moves,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management.
“But a better explanation would be that concerns elsewhere overwhelmed the BOJ action.”
In the 11 days since the BOJ board’s announcement, the benchmark Nikkei index has fallen 8.5 per cent, despite a sharp rebound on Monday, while the yen has climbed 6.5 per cent against the dollar.
Japanese bank shares have slumped by as much as 30 per cent as they are unlikely to pass on negative rates to savers, who already get negligible interest on their deposits but would baulk at paying to save.
Negative rates could push down bank operating profits by 8-15 per cent, Standard and Poor’s said.
The 10- year Japanese government bond yield initially fell below zero on the easing – a first among Group of Seven economies.
But it has recovered from minus 0.035 per cent last week to 0.090 per cent above zero, with Japanese markets becoming more unstable as investors are at a loss on how to reckon fair value.
Prices on 10-year JGB futures imply volatility above 5 per cent, a 2.5-year high and more than triple the level at the start of the year.
Thishighvolatilitycouldpersist, and the BOJ has only itself to blame, some market players say. — Reuters