The Bank of Japan’s negative interest-rate strategy is clearly designed to keep the yen from strengthening.
That is obvious from the deft verbal maneuvering by BOJ Gov. Haruhiko Kuroda, who apparently had decided to unleash the unorthodox policy, in Davos last month. At a Jan. 23 symposium on the global economic outlook, Kuroda laid out the option of China controlling capital outflows, framing the idea as his personal view.
Chinese authorities face the challenge of keeping the yuan from excessive swings while maintaining monetary easing, Kuroda said at the symposium, which included such other international policy makers as International Monetary Fund chief Christine Lagarde. The problem is the relationship between the yuan’s rates and the domestic financial environment, he stated.
Kuroda went on to say that, in order to properly manage foreign exchange rates and the domestic environment, “capital controls could be useful.”
The proposal drew different media reactions. Japanese news organizations generally did not highlight the statement in their reports.
On the other hand, the Financial Times welcomed the idea, with a Jan. 26 editorial saying capital controls “may be China’s only real option.” As capital outflows from China accelerate, even Beijing’s series of yuan-buying, dollar-selling interventions does not help. Rather, the interventions might cause China’s foreign-exchange reserves to dry up and lead to unintended monetary tightening.
The Bank of Japan will limit the scope of its newly introduced negative interest rate to a small portion of financial institutions’ current-account deposits — between 10 trillion yen and 30 trillion yen ($84.5 billion to $253 billion), The Nikkei has learned.
The amount will represent no more than a tenth or so of the total. The BOJ reckons that even a narrow application of its new monetary easing tool will spur banks to lend and invest.
Bank shares plunged after the policy change was introduced last week. The BOJ is trying to give the stock market a sense of the size of the impact on financial industry earnings.
The rate of negative 0.1%, to take effect on Feb. 16, will initially apply to about 10 trillion yen of reserves, the BOJ announced Wednesday.
Current-account funds are expected to total 260 trillion yen in February, 210 trillion yen of which will earn interest at a 0.1% rate. Of the remainder, an initial 10 trillion yen will be subject to the negative rate, while 40 trillion yen will earn zero interest. While the total balance is expected to rise at an annual pace of 80 trillion yen, the majority of this growth will occur within the zero-interest tier.
The Bank of Japan’s unexpected rate cuts to negative are a desperate attempt to help out the FED and to support the dollar at the expense of the aging Japanese population.
The negative market reaction to the FED’s rate hike of December shows that investors do not believe an economic recovery in the US is underway. Two reasons make central banks start to raise interest rates.
The first is that economy is doing well, and central banks have to prevent an overheated economy. But it is also a signal to investors everything is going well. In this situation, the first reaction of investors will be the opposite as central bankers planned they will and increase their investments and markets will go up.
The second reason central banks raise interest rates is the defensive one; the moment the economy is out of control, investors are beginning to abandon the sinking ship. The continually increasing interest rate has the task of keeping the investors aboard. Central banks in less developed economies raise rates to defend the national currency, thus preventing investors from fleeing. An increase in the interest rate can add fuel to the fire and in many cases has the opposite effect. Investors start smelling angst of the authorities and start abandoning the sinking ship. In such a situation stock markets are coming crashing down because investors withdraw from them.
We saw this last pattern happening in the US economy after the December FED’s rate hike. As a result, the dollar-yen exchange rate is starting to decline, with the value of the dollar falling off as Japanese investors start panicking and fleeing the US market. Surely, Japanese investors know that a rate hike without an accompanying economic growth will erode every existing investment.
There is a general misconception according to which countries drive their currency down to generate growth. People adhere to the simplistic belief that a weak currency drives exports and helps the nation to prosper. The fact is that a cheap currency creates growth by giving away real goods in exchange for IOU (I Owe Yous) or paper debt obligations that will never be repaid. The US is the beneficiary or the receiving end of the weak yen policy. Because the US continues to maintain its world hegemony, it needs a strong dollar. A strong dollar makes everything the US empire buys in the world cheap. A strong dollar causes the world to be willing to exchange real goods for printed paper dollars that have no intrinsic value, and that are issued by a country that does not have the industrial capacity to ever repay what it owes its debtors.
Bank of Japan Gov. Haruhiko Kuroda stayed true to his word that he will do whatever it takes to beat deflation. With falling oil prices and a slowing China threatening his inflation target, Kuroda resorted to negative interest rates, taking the central bank to uncharted territory.
The negative rates aim to get deposits now sitting idle at the central bank circulating through the private sector, lifting the economy and prices in the process. The BOJ is effectively charging banks for holding their money — not a normal feature of monetary policy. The central bank is fully aware of possible side effects, including negative yields at banks.
Turmoil in domestic and foreign markets has far exceeded expectations. The BOJ was forced to extend its time frame for achieving its 2% inflation target again, to around the first half of fiscal 2017.
If the bank cannot allay uncertainty by this spring’s pay negotiations, wage growth will fizzle out. The deflation-fighting strategy coordinated by the government and the BOJ would get derailed.
Before traveling to the World Economic Forum in Davos last week, Kuroda directed staffers to devise further easing measures. He presented their proposal for negative interest rates at the policy board meeting, bracing for stiff opposition.
The Bank of Japan is taking a serious look at expanding its monetary easing measures
The oil rout has changed the BOJ’s thinking. “If falling consumer prices resulting from crude’s plunge are making more people feel that prices are less likely to rise, then we should consider additional easing,” said a senior BOJ official.
Sliding oil prices weighing on the 2% inflation target
The strengthening yen
Expectations growing within the government and the ruling party for additional easing steps
Says further that the BOJ will downgrade its fiscal 2016 consumer price growth forecast from 1.4% to around 1%. (The bank will release its Outlook for Economic Activity and Prices report on January 29). And its also likely to extend the time frame for hitting the 2% inflation target beyond “around the second half of fiscal 2016” as currently estimated
“Well, that escalated quickly. I mean, really, that got out of hand fast.”
The spirit of fictional journalist Ron Burgundy stalks global markets so far this year. Investors barely had enough time for a cup of tea and a “fine thanks, how was your Christmas” chat with colleagues before the wheels fell off.
Circuit breakers kicked in to suspend trading in Chinese stocks for two days in a row before authorities binned the limits altogether, fearing that they were throwing fuel on the selling pressure. Metals are in meltdown. Oil is falling faster than forecasts can keep up. The International Monetary Fund is warning that emerging markets are in a very tricky spot, and that better safety nets are needed to prevent market ructions from infecting the global system.
Even UK markets are looking shaky. Sterling has flopped to its lowest point in five-and-a-half years as investors rip up forecasts for when the Bank of England will start raising interest rates. (Did we say May? Try November.)
All told, it is the worst start to any trading year anyone can remember, and the worst for European stocks since at least the early 1970s. Last year brought the largest number of corporate debt defaults since 2009, says Standard & Poor’s, the rating agency, and this year corporate downgrades are set to far outweigh the upgrades.
Bears have their tails up. “Sell (mostly) everything,” wrote Andrew Roberts, an analyst at RBS. “My ‘severe downside for the world’ call is looking OK so far.”
One big problem here: many of the usual emergency exits are bricked up.
The Bank of Japan is ready to take “even bolder” steps to meet its target of 2% price growth, Gov. Haruhiko Kuroda said Monday.
The central bank “will do whatever it can” to raise growth in the consumer price index from its current near-zero level, the governor told a meeting of the Life Insurance Association of Japan. The target “will absolutely be realized,” he said.
So-called supplementary measures to the bank’s current monetary easing were hatched at a policy meeting Dec. 18. But those changes were merely technical tweaks to allow easing to continue smoothly, leaving market players who expected additional easing aimed at fighting deflation disappointed. Kuroda’s emphasis on openness to “drastic” measures seems designed to dispel fears that the bank has run out of room to expand easing itself.
The governor since November has worded his statements carefully to keep open the possibility of further easing, after the decision to forgo such a move in October brought speculation that the central bank was not serious about its 2% inflation target. “When it comes to price developments being at stake, the bank must be the first mover,” he told business leaders in Nagoya on Nov. 30.