Bank of Ja­pan to hold off rate cut amid un­sta­ble bond mar­ket

The Pak Banker - - FRONT PAGE -

The Bank of Ja­pan is set to hold off cut­ting in­ter­est rates at next week's rate re­view, sources say, as it scram­bles to soothe mar­ket jit­ters caused by Jan­uary's sur­prise de­ci­sion to adopt neg­a­tive in­ter­est rates. Mar­kets are rife with spec­u­la­tion the BoJ will ex­pand mon­e­tary stim­u­lus in com­ing months to re­flate a stag­nant econ­omy, af­ter Jan­uary's move failed to boost stock prices or ar­rest an un­wel­come rise in the yen.

But many cen­tral bank pol­i­cy­mak­ers are re­luc­tant to ease again soon un­less ex­ter­nal shocks jolt global fi­nan­cial mar­kets enough to de­rail Ja­pan's frag­ile eco­nomic re­cov­ery. Even if it were to act, the BoJ would pre­fer to top up as­set pur­chases rather than cut rates, say sources fa­mil­iar with the bank's think­ing, given the bond mar­ket in­sta­bil­ity and pub­lic crit­i­cism Jan­uary's neg­a­tive rate de­ci­sion re­ceived.

"Now is the time to care­fully scru­ti­nise how the ef­fect (of the neg­a­tive rate pol­icy) will spread to the econ­omy," BoJ Gov­er­nor Haruhiko Kuroda said to­day, sig­nalling that no im­me­di­ate stim­u­lus was forth­com­ing. While the in­ten­tion of neg­a­tive rates was to push down al­ready-low bor­row­ing costs, some BoJ of­fi­cials worry that the re­cent sharp drop in long-term bond yields may be over­done and driven largely by spec­u­la­tive trad­ing. "Neg­a­tive rates have proved very pow­er­ful in push­ing down bond yields," said one source. "The BoJ doesn't in­tend to keep cut­ting rates fre­quently at a set tim­ing." Cut­ting rates again may also draw crit­i­cism from banks, many of whom are an­gry for hav­ing their al­ready thin mar­gins squeezed and be­ing caught of­f­guard by the BoJ's sud­den de­ci­sion.

The BoJ stunned mar­kets late Jan­uary by de­cid­ing to cut rates into neg­a­tive ter­ri­tory, adding to its mas­sive as­set-buy­ing pro­gramme dubbed "quan­ti­ta­tive and qual­i­ta­tive eas­ing" (QQE) in a fresh drive to ac­cel­er­ate in­fla­tion to its 2 per­cent tar­get. Ja­panese govern­ment bond yields tum­bled to fresh record lows on Tues­day af­ter a firm 30-year auc­tion fu­elled a rally for debt in­stru­ments that still of­fer pos­i­tive yields. At the two-day pol­icy meet­ing end­ing on Tues­day, the BoJ's nine-mem­ber board will ex­am­ine whether over­seas head­winds and slow wage growth have hurt ex­ports and con­sump­tion enough to de­rail a frag­ile eco­nomic re­cov­ery.

Ja­pan's econ­omy con­tracted in the fi­nal quar­ter of 2015 and some an­a­lysts ex­pect it to slide back into re­ces­sion in the cur­rent quar­ter, as slow wage growth and slug­gish global de­mand weigh on con­sump­tion and ex­ports. Given the gloomy out­look, many an­a­lysts polled by Reuters ex­pect the BoJ to ease again at or be­fore the July pol­icy meet­ing. But with mar­kets un­sta­ble from the Jan­uary move and banks strug­gling to adapt their trad­ing sys­tems to neg­a­tive rates, the BoJ has lit­tle to gain by eas­ing again soon, some an­a­lysts say.

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