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29 Jan 2016
BOJ adopts negative interest rates, but... - Westpac
FXStreet (Bali) - Sean Callow, FX Strategist at Westpac, summarizes the surprising decision by the BOJ to slash interest rates from 0.1% to -0.1%, however, Sean notes that the details show that this is a less punitive measure than at first glance.
Key Quotes
"The Bank of Japan’s steady hand on the pace of QE at JPY80trillion p.a. was largely expected but the adoption of a negative interest rate on a portion of bank deposits held at the BoJ was a big surprise, tempered only by the Nikkei News report of a discussion on the topic. Previous public commentary on negative rates by Governor Kuroda was relatively dismissive and the vote was only 5-4 for this step so controversy should linger."
"From 16 Feb, the BoJ will apply a rate of -0.1% on certain deposits and says this rate could be cut again if necessary. The details show that this is a less punitive measure than at first glance, with concern over “financial institutions’ earnings”. Other central banks have negative rates on the balances of banks’ deposits over the prudentially required reserves. The BoJ is adding another layer, protecting the additional reserves created by banks’ sales of JGBs to the BoJ under QQE so far. These reserves will still attract a +0.1% rate. Reserves for prudential reasons and selected other programs earn zero. So it’s only balances above these that will be penalized with the -0.1% rate, which in practice will mostly be BoJ asset purchases beyond 16 Feb."
"The BoJ’s accompanying forecasts included the expected further delay in the timing of the return of CPI to 2%, now seen in the Apr-Sep 2017 window. GDP forecasts were little changed. So the real surprise was limited to the decision on the deposit rate."
"The initial surge in USD/JPY was excessive (118.60 area to 121.49 high) given the unchanged QE total but this meeting is surely still a positive for USD/JPY as it shows Kuroda recognizes that the bank was not on track to reach its inflation target and is willing to lead a battle into uncharted territory. Expectations for an increase in the JPY80trn QE pace will remain ahead of the 15 March meeting."
"We are inclined to nudge up our 1 month USD/JPY target from 120 to 121, maybe 122 at a stretch. As for the implications for other currencies, we have seen a knee-jerk bounce in USD/Asia pairs on expectations of another round of competitive currency depreciation. This has left AUD/USD only slightly higher. But we expect that this further step towards depressing Japanese yields will in due course encourage outflows from Japan to higher yielding bond markets abroad. AUD should be one beneficiary."
Key Quotes
"The Bank of Japan’s steady hand on the pace of QE at JPY80trillion p.a. was largely expected but the adoption of a negative interest rate on a portion of bank deposits held at the BoJ was a big surprise, tempered only by the Nikkei News report of a discussion on the topic. Previous public commentary on negative rates by Governor Kuroda was relatively dismissive and the vote was only 5-4 for this step so controversy should linger."
"From 16 Feb, the BoJ will apply a rate of -0.1% on certain deposits and says this rate could be cut again if necessary. The details show that this is a less punitive measure than at first glance, with concern over “financial institutions’ earnings”. Other central banks have negative rates on the balances of banks’ deposits over the prudentially required reserves. The BoJ is adding another layer, protecting the additional reserves created by banks’ sales of JGBs to the BoJ under QQE so far. These reserves will still attract a +0.1% rate. Reserves for prudential reasons and selected other programs earn zero. So it’s only balances above these that will be penalized with the -0.1% rate, which in practice will mostly be BoJ asset purchases beyond 16 Feb."
"The BoJ’s accompanying forecasts included the expected further delay in the timing of the return of CPI to 2%, now seen in the Apr-Sep 2017 window. GDP forecasts were little changed. So the real surprise was limited to the decision on the deposit rate."
"The initial surge in USD/JPY was excessive (118.60 area to 121.49 high) given the unchanged QE total but this meeting is surely still a positive for USD/JPY as it shows Kuroda recognizes that the bank was not on track to reach its inflation target and is willing to lead a battle into uncharted territory. Expectations for an increase in the JPY80trn QE pace will remain ahead of the 15 March meeting."
"We are inclined to nudge up our 1 month USD/JPY target from 120 to 121, maybe 122 at a stretch. As for the implications for other currencies, we have seen a knee-jerk bounce in USD/Asia pairs on expectations of another round of competitive currency depreciation. This has left AUD/USD only slightly higher. But we expect that this further step towards depressing Japanese yields will in due course encourage outflows from Japan to higher yielding bond markets abroad. AUD should be one beneficiary."