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2 Feb 2016
JPY: Kuroda strikes again – ING
FXStreet (Delhi) – James Smith, Economist at ING, suggests that the Bank of Japan Governor Kuroda has again displayed his ability to take markets by surprise after he introduced negative rates.
Key Quotes
“In a move with echoes of the October 2014 decision to boost stimulus, the Bank of Japan surprised markets with the introduction of negative rates, designed (at least for now) to complement QQE. The intent was clearly to deliver maximum impact through surprise, as Gov.
In the statement, the bank cites financial market volatility as “increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed”. It also said that the move was also designed to “maintain momentum” towards the 2% inflation target, which is likely referring to a recent fall in inflation expectations. The recent JPY appreciation was probably also a driving factor, which before the meeting, was stronger on a trade-weighted basis than in October 2014.
To us, this decision signals two things. Firstly, that the bank shares the view that QQE faces limits. This was already fairly clear from the last “Summary of opinions”, where several members expressed concern both about the limits of QQE and the risks of signalling that these limits exist.
The second and probably main implication is that this move effectively lays the ground for tapering of the asset purchase programme. By introducing negative rates, the BoJ is essentially reducing its reliance on the QQE programme. The BoJ has signalled that it has the ability to cut rates further, and such a move cannot be ruled out in March if conditions deteriorate further. Indeed, further rate cuts are also very likely to come around the time that the bank decides to start signalling its intention to taper JGB purchases.”
Key Quotes
“In a move with echoes of the October 2014 decision to boost stimulus, the Bank of Japan surprised markets with the introduction of negative rates, designed (at least for now) to complement QQE. The intent was clearly to deliver maximum impact through surprise, as Gov.
In the statement, the bank cites financial market volatility as “increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed”. It also said that the move was also designed to “maintain momentum” towards the 2% inflation target, which is likely referring to a recent fall in inflation expectations. The recent JPY appreciation was probably also a driving factor, which before the meeting, was stronger on a trade-weighted basis than in October 2014.
To us, this decision signals two things. Firstly, that the bank shares the view that QQE faces limits. This was already fairly clear from the last “Summary of opinions”, where several members expressed concern both about the limits of QQE and the risks of signalling that these limits exist.
The second and probably main implication is that this move effectively lays the ground for tapering of the asset purchase programme. By introducing negative rates, the BoJ is essentially reducing its reliance on the QQE programme. The BoJ has signalled that it has the ability to cut rates further, and such a move cannot be ruled out in March if conditions deteriorate further. Indeed, further rate cuts are also very likely to come around the time that the bank decides to start signalling its intention to taper JGB purchases.”