The 10-year Japanese government bond (JGB) yield, which was 0.22 per cent on the day before the announcement, dropped sharply to a historic low of 0.06 per cent. The yield on shorter-term JGBs of up to eight years turned negative.
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Banks who leave their excess funds in the BOJ will now be charged a 0.1 percent levy.
Risk aversion reigns supreme in the markets fuelled by two fears – that a global recession is looming large and that the central banks around the world are powerless to prevent it.
New York Fed chief William Dudley said last month that Fed officials are not “at all” seriously contemplating negative rates, though it could be a tool to consider in the event of a sharp downturn. For instance, central banks may be willing to demonstrate their resolve by exploring new forms of monetary policy, but doesn’t this “resolve” stem from a loss of control over the economy?
In writing about the limits of central bank power, El-Erian, an experienced and highly conventional thinker about policy, is in agreement with Axel Merk, a maverick hard currency advocate.
Even after about three years of Abenomics and record stimulus from the central bank, consumer price inflation is still barely above zero and Japan’s economy still can’t escape a roller- coaster cycle of expansion and contraction. Certainly the Bank of Japan has for some time been buying equities, and thus far the impact of this has not proven to be what an economy in demographic decline requires.
Gold and JPY should remain the preferred safe havens with the BoJ seemingly having run out of bullets in the midst of the ranging currency war. It’s time for politicians to try to rein in their overzealous central bankers and kill this unsafe policy before it wreaks more damage. So what do you do?
On the one hand, an “all-out” effort by the BoJ and the administration of Prime Minister Shinzo Abe to counter strength in the currency could spark fears of what economists term “fiscal dominance” and lead to “nearly unbounded” upside in the USA dollar/yen pair. For example, in the last month we’ve held meetings with many smaller businesses based at centres such as Hoult’s Yard in Newcastle and NetPark in County Durham, in emerging sectors such as digital and bio-science.
Today, the Bank of Japan began doing something that sounds kind of insane. Yellen, though, backtracked on Thursday when she told the Senate Banking Committee that the Fed has not taken negative interest rates off the table.
It would be like if your personal bank started charging you to keep money in your savings account instead of paying you the pitiful interest you now receive.
It’s that resilience in the face of global challenges that characterises the mood amongst many of our business contacts in the North East at present. NPR’s Jim Zarroli explains why.
But why would any investor willingly buy a bond that loses money over time? So does Sweden, the eurozone, and now Japan.
Asking rhetorically how far the BOJ might go with negative rates, he said: “I don’t have the answer yet”. To call this premature would be an understatement, and perhaps further to the point, risky for the long-term health of the global economy. Right now, countries like Japan are desperate to find ways to stimulate growth.
While testifying before the U.S. House of Representatives Financial Services Committee on Wednesday, Fed chair Janet Yellen attempted to soothe markets by hinting that any rate cuts by the U.S. central bank in the coming months are unlikely. David Blanchflower is a professor of economics at Dartmouth. If those negative rates leave me worse off than the cost of storing physical currency, the sensible choice is rent a vault. Since they didn’t hike rates when the economy strengthened, they will have no other place to go but negative rates.
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ZARROLI: Over the past few years, these countries have been driving rates closer and closer to zero, and now, in some cases, they’ve fallen into negative territory.
