The Bank of Japan said it would start targeting 10-year interest rates, committing to keep them around zero as part of a new policy framework aimed at stoking inflation.
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The Bank said it would maintain its annual $783bn (£604bn) asset purchase programme and other easing measures until such time as its 2% inflation target was reached and appeared stable. Economists expect the Fed to leave rates unchanged when it ends its two-day meeting Wednesday.
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“The central bank’s decision to keep the 0.1 negative interest rate gave the impression that the BOJ gave full consideration to banks’ businesses”, said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Securities. Bond traders on the other hand seem like a more hard sell with the 10-year JGB now trading at -0.05% from a high of -0.02% earlier in the day. Higher longer-dated US yields are often considered negative for emerging assets but some analysts said steeper developed yield curves were not necessarily bad news if their improved the outlook for banks, now burdened by sub-zero bond yields.
USA futures pointed to a firmer open on Wall Street after the Bank of Japan tweaked its monetary policy framework, as investors awaited the latest rate announcement from the Federal Reserve.
In a 61-page assessment, the BOJ said its “quantitative and qualitative easing”, monetary policy, known as QQE, had succeeded in ending deflation, or falling prices.
That’s the crux of the problem for the BoJ: how to get some runs on the board so that consumers and business will take seriously the inflation target and adjust their behaviour accordingly. And central banks used to increase and shrink the money supply by injecting or withdrawing funds in order to achieve a target rate. It raised rates in December 2015 and hasn’t made a move since then.
In December 2015, the USA central bank raised rates for the first time since 2006.
This should raise public expectations of price levels in the future and, in turn, should lower real interest rates and stimulate the economy because loans will be paid back in a devalued currency, according to the FT.
However, the historical record, while recognizing the “conventional wisdom” of avoiding political confrontation, doesn’t bear out this argument as the Fed has cut interest rates within two months of the election on three occasions since 1984. If you would like to discuss another topic, look for a relevant article.
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