BoJ stuns mar­kets with neg­a­tive in­ter­est rates

The Pak Banker - - FRONT PAGE -

The Bank of Ja­pan (BoJ) un­ex­pect­edly cut a bench­mark in­ter­est rate below zero on Fri­day, stun­ning in­vestors with an­other bold move to stim­u­late the econ­omy as volatile mar­kets and slow­ing global growth threaten its ef­forts to over­come de­fla­tion.

Global eq­ui­ties jumped, the yen tum­bled and sov­er­eign bonds ral­lied af­ter the BoJ said it would charge for a por­tion of bank re­serves parked with the in­sti­tu­tion, an ag­gres­sive pol­icy pi­o­neered by the Euro­pean Cen­tral Bank (ECB).

"What's im­por­tant is to show peo­ple that the BOJ is strongly com­mit­ted to achiev­ing 2 per­cent in­fla­tion and that it will do what­ever it takes to achieve it," BOJ Gov­er­nor Haruhiko Kuroda told a news con­fer­ence af­ter the de­ci­sion. In adopt­ing neg­a­tive in­ter­est rates Ja­pan is reach­ing for a new weapon in its long bat­tle against de­fla­tion, which since the 1990s have dis­cour­aged con­sumers from buy­ing big be­cause they ex­pect prices to fall fur­ther. De­fla­tion is seen as the root of two decades of eco­nomic malaise.

Kuroda said the world's third-big­gest econ­omy was re­cov­er­ing mod­er­ately and the un­der­ly­ing price trend was ris­ing steadily. "But there's a risk re­cent fur­ther falls in oil prices, un­cer­tainty over emerg­ing economies, in­clud­ing China, and global mar­ket in­sta­bil­ity could hurt busi­ness con­fi­dence and de­lay the eradication of peo­ple's de­fla­tion­ary mind­set," he said. "The BoJ de­cided to adopt neg­a­tive in­ter­est rates ... to fore­stall such risks from ma­te­ri­al­iz­ing." Kuroda said as re­cently as last week he was not think­ing of adopt­ing a neg­a­tive in­ter­est rate pol­icy for now, telling par­lia­ment that fur­ther eas­ing would likely take the form of an ex­pan­sion of its mas­sive as­set-buy­ing pro­gram.

But, with con­sumer in­fla­tion just 0.1 per­cent in the year to De­cem­ber de­spite three years of ag­gres­sive money-print­ing, the BOJ's pol­icy board de­cided in a nar­row 5-4 vote to charge a 0.1 per­cent in­ter­est on a por­tion of cur­rent ac­count de­posits that fi­nan­cial in­sti­tu­tions hold with it. The cen­tral bank said in a state­ment an­nounc­ing the de­ci­sion it would cut in­ter­est rates fur­ther into neg­a­tive ter­ri­tory if nec­es­sary, in its bat­tle against de­fla­tion.

"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. Some econ­o­mists doubted the BOJ move would prove ef­fec­tive.

"It has gone on the de­fen­sive," said Hideo Ku­mano, chief econ­o­mist at Dai-ichi Life Re­search In­sti­tute. "It made this de­ci­sion not be­cause it's ef­fec­tive, but be­cause mar­kets are col­laps­ing and it feels it has no other op­tion." Sev­eral Euro­pean cen­tral banks have cut key rates below zero, and the ECB be­came the first ma­jor cen­tral bank to do so in June 2014. In pur­su­ing the same path, the BoJ is hop­ing banks will step up lend­ing to sup­port ac­tiv­ity in the real econ­omy, rather than pay a penalty to de­posit ex­cess cash at the cen­tral bank.

There is lit­tle sign of any pent-up de­mand from Ja­panese banks or cash-rich com­pa­nies for fresh funds, how­ever, and any money re­leased into the sys­tem may merely be hoarded or steered into spec­u­la­tive ac­tiv­ity.

"This is an ag­gres­sive all-stick-no-car­rot ap­proach to spurring in­vest­ment," said Martin King, co-man­ag­ing di­rec­tor at Ty­ton Cap­i­tal Ad­vi­sors in Tokyo.

The BoJ main­tained its pledge to ex­pand base money at an an­nual pace of 80 tril­lion yen ($675 bil­lion) via ag­gres­sive pur­chases of Ja­panese govern­ment bonds (JGBs) and risky as­sets con­ducted un­der its quan­ti­ta­tive and qual­i­ta­tive eas­ing (QQE) pro­gram. The BoJ's move - boost­ing the dol­lar by 1.7 per­cent against the yen - could make it even harder for the U.S. Fed­eral Re­serve to raise in­ter­est rates four times this year, as orig­i­nally en­vis­aged by its pol­icy board. Mar­kets have been split on whether Ja­pan's cen­tral bank would ease pol­icy as slump­ing oil costs and soft con­sumer spend­ing have ground in­fla­tion to a halt, knock­ing price growth fur­ther away from the BoJ's am­bi­tious 2 per­cent tar­get.

This is the fourth time the BoJ has pushed back its time frame for hit­ting its in­fla­tion tar­get - from an ini­tial goal of around March 2015. Fri­day's sur­prise in­ter­est rate de­ci­sion came in the wake of data that showed house­hold spend­ing and out­put slumped in De­cem­ber, un­der­scor­ing the frag­ile na­ture of Ja­pan's re­cov­ery. Many an­a­lysts had al­ready been sug­gest­ing that the BoJ had lit­tle scope left to ex­pand its as­set­buy­ing pro­gram. "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 JGBs is lim­ited." Kuroda said the BoJ was not run­ning out of pol­icy am­mu­ni­tion. "To­day's steps don't mean that we've reached lim­its to our JGB buy­ing," he said. "We added in­ter­est rates as a new eas­ing tool to our ex­ist­ing QQE frame­work."

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