Markets were stunned when the Bank of Japan cut a benchmark rate below zero – in a move many described as bold – to kick start the country’s economy as unstable markets and decelerating worldwide growth undermine the central bank’s efforts to rid the country of deflation, a problem that has hung around one way or another for several decades.
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“While that wouldn’t be a complete solution to fall in oil prices and concerns about slowdown in China, it will ease excessive reactions in markets”, he said.
We continue to recommend $/JPY higher as part of our FX Top Trade recommendation for 201f6, and forecast 130 in 12 months. “Japanese banks may also try to boost lending not just to domestic parties but internationally as well”, they add.
ANZ senior economist Tom Kenny said the aim of negative rates was to force financial institutions to either lend or invest excess cash in risky assets, but the surprise move had dented BOJ governor Haruhiko Kuroda’s reputation.
The yield on benchmark 10-year Japanese government bonds plunged to a record low of 0.09 per cent, and the yen fell 1.87 per cent to 121.03, on track for its biggest daily decline against the United States dollar in over a year.
In the U.S., Japan’s interest rate cut was seen as a sign the U.S. Federal Reserve may not be able to raise rates four times this year, as it has projected. That put oil on track for a second weekly gain, though volatility has climbed to its highest since 2009 as traders try to price in the uncertainty around supply cuts.
The Nikkei rose 1.2 percent to 17,727.62 points by midmorning trade, after hitting as high as 17,821.37 earlier, the highest since January 8.
‘The BoJ is well aware that significant market turbulence can negatively affect the real economy, and the easing measure is more of a pre-emptive and symbolic move’.
“Going into this GDP number there was a strong expectation that there had been very little spending (in the U.S.), especially given how retailers had been performing going into the Christmas period”, said Douglas Borthwick, managing director of Chapdelaine Foreign Exchange in NY. “Pressure on the BoJ will mount to do even more in coming months to attain their inflation target”.
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The yield on the 10-year bond dropped 3 ½ basis points to 0.06 per cent as of 10:20am in Tokyo from Friday, according to Japan Bond Trading Co, the nation’s largest inter-dealer debt broker. Futures for USA 10-year bonds 0#TZY: rose 5 ticks. “We don’t know this negative rate policy will be good for the economy in the end”.
