Japan joins negative rates club
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The Bank of Japan has cut interest rates to minus 0.1 per cent, stunning analysts and sparking a surge in equity and bond markets, as policymakers around the world respond to mounting worries about the outlook in China and the risks of a global slowdown.
The BoJ’s move forms part of a trend that has emerged in recent weeks, with many of the world’s major central banks signalling that they stand ready to counter the slowdown in emerging markets and slumping oil prices. These hints have helped shore up equity markets that began the year with sharp falls.
Even the world’s more resilient economies are showing ill effects from sluggish global demand with gross domestic product growth in the US slowing sharply in the fourth quarter to an annualised rate of just 0.7 per cent as tumbling oil prices and sagging exports held back the recovery.
The unexpected action in Japan highlights the global weakness of inflation and could spark renewed fears of so-called “currency wars” as monetary stimulus in Europe and Japan weighs on the euro and the yen.
“This is a very big regime change,” said Masaaki Kanno, chief economist at JPMorgan in Tokyo. “As of now, the BoJ has another tool available for additional easing.”
The BoJ’s move sent investors rushing to the safety of government bonds, with yields in Europe and Japan falling further below zero on Friday. Negative yields now account for a quarter of JPMorgan’s index for government bonds.
The yen plunged more than Y1.5 to Y120.8 against the dollar in the wake of the cut, while the Topix stock index rose almost 3 per cent to close at 1,432. In New York, the S&P 500 index of stocks rose just over 1 per cent in late morning trading.
The European Central Bank and the Bank of England have also signalled that they are willing to respond to the rocky start to 2016 by shifting their policy stances. This week the Federal Reserve said it was closely watching global turbulence and the potential implications for US policy.
The BoJ’s move comes as central banks delve into negative territory in a bid to stimulate economic growth. The European Central Bank became the first major central bank to venture below zero in June 2014 and now charges banks 0.3 per cent to hold their cash overnight.
BoJ governor Haruhiko Kuroda has been on a quest to rescue Japan from decades of on-off deflation with a huge programme of monetary stimulus, but with inflation mired at an annual rate of 0.2 per cent in December, there were signs of a weak wage round this spring.
“Through the minus interest rate combined with quantitative easing, I hope we can support companies and individuals in breaking their deflationary mindset,” said Mr Kuroda. He said China’s slowdown and market volatility this year had threatened to damage business confidence in Japan.
Mr Kuroda said the move to negative rates did not mean the BoJ was out of room to raise asset purchases from the current pace of Y80tn a year. The bank could raise purchases or cut interest rates further in the future, he said.
The move will add to Mr Kuroda’s reputation for surprises, suddenly adopting policies he has vehemently denied were even possible. Eight days ago he told parliament the BoJ was “not seriously considering” a negative rate.
With the BoJ board voting for the decision by a narrow majority of five to four, new member Yukitoshi Funo backed Mr Kuroda. Sayuri Shirai, who has backed easing in the past, voted against.
Ms Shirai said the move could be misunderstood as implying the BoJ had reached a limit on asset purchases and a complicated three-tier system of interest rates could cause confusion.
The three-tier system makes the move somewhat weaker than comparable actions by the ECB and other European central banks. The BoJ will only pay negative rates on new bank reserves resulting from its programme of asset purchases. All existing bank reserves — which amount to about $2.5tn or 50 per cent of gross domestic product — will continue to be paid interest at 0.1 per cent.
That means there is unlikely to be much impact on bank profits or bank depositors in the short term. However, for banks considering whether to accept an extra deposit or make an extra loan, the negative rate will matter most.
The BoJ kept asset purchases unchanged at Y80tn a year but pushed back the date it expects to hit its 2 per cent inflation goal by another six months. It is now aiming for the first half of fiscal 2017 — so between March and October of that year.
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