SINGAPORE: In an unexpected move on Friday (Jan 29), the Bank of Japan (BOJ) deployed a new weapon in the central bank’s efforts to drive up inflation: a negative interest-rate policy.
WHAT IT MEANS: Under the new program, the BOJ will apply an interest rate of negative 0.1 per cent on current accounts that financial institutions hold with it.
Essentially, it means that banks who park their excess funds with the central bank will have to pay to do so.
By dipping interest rates into negative territory, the BOJ hopes that banks will step up lending to stimulate activity in the real economy and encourage corporates to boost capital expenditure. The BOJ has been trying to build up positive momentum in capital expenditure through heavy money printing and it is a critical component of Prime Minister Shinzo Abe’s reflationary policies known as “Abenomics”.
Several central banks in Europe such as the Swiss National Bank and Denmark’s Nationalbank have already cut key rates below zero in recent years, but the European Central Bank (ECB) was the first major central bank to adopt such a policy in 2014.
For now, this negative interest-rate policy in Japan and Europe applies only to the central banks’ direct dealings with other banks, and does not affect the average man in the street.
WHY IS THE BOJ DOING THIS? Analysts say the BOJ is keen to take a leaf out of its European counterparts’ book as it struggles to achieve its inflation target of 2 per cent and as a slew of weaker-than-expected data painted a worrying outlook for the world’s third-biggest economy.
“It’s easy to look at the success that the ECB has had with negative interest rates. A number of commentators now point to these negative rates as a key driver of the velocity of money in the European monetary system,” Michael McCarthy, chief market strategist at CMC Markets, said. “Perhaps the BOJ was looking at that successful stimulation of the European economy and decided that this was the appropriate measure for Japan.”
ARE THERE RISKS? There are market watchers who think that the latest step taken by the central bank may yield limited positive impact.
With little signs of any pent-up demand from Japanese banks or cash-rich companies for fresh funds, any money released into the system may simply end up adding to the already-huge cash hoards held by Japan’s companies.
“While investment in real estate might be stimulated because of ever lower mortgages, companies in industry and services have not been running short of cash and banks have already been willing to lend,” Martin Schulz, senior economist at the Fujitsu Research Institute, said in an email interview.
“Companies in Japan have not tapped additional credit supply because they still do not see enough attractive investment opportunities," the Tokyo-based economist added.
An electronic board displaying the movement of the Nikkei 225 index in Tokyo. (REUTERS/Toru Hanai)
WHAT SPARKED THE VOLATILITY: The Nikkei 225 index closed up 2.83 per cent in a whirlwind ride which saw the benchmark index soaring as much as 3.5 per cent and sliding 1 per cent at one point.
Analysts have attributed the volatility to uncertainty arising from the new scheme and in particular, its impact on the country’s banking sector.
Financials bucked the rally on Friday, with Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group tumbling between 1.7 to 2.8 per cent.
“The negative impact on banks and money markets was seen as too punishing. It is the banks, after all, who are supposed to lend more to the private sector,” Tokyo-based Mr Schulz said.
HOW WILL IT IMPACT MARKETS? For equity investors, the BOJ’s latest move will be good news. Market watchers expect Friday’s rally to be a common sight in Japanese share markets from here on, as the central bank continues to ramp up its easing measures.
“The ongoing buying of ETFs and other listed securities will mean support for the market. Although we may see some significant pullbacks along the way, the gains in the Nikkei today are likely to be sustained and added to,” CMC Markets’ Mr McCarthy said.
The outlook for the currency, however, is less straightforward.
Friday’s announcement may have halted a yen rally that was threatening to be the strongest since Kuroda took office in 2013, but some analysts don’t expect the weakening trend to last for long.
“Dollar-yen might move a bit higher to the 121-handle, but it will not stay or breach that level. Once the risk sentiment is turned on again, dollar-yen will likely come off and head back to the 118-120 levels,” Maybank’s Mr Tang said in a telephone interview.
Against the dollar, the yen fell more than 2 per cent at one point to fetch 121.495 yen, marking the Japanese currency’s lowest level in more than a month.