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29 January 2016
In an unprecedented move the Bank of Japan has moved official interest rates to -0.1% from 0%. This follows similar moves last year by the European Central Bank.
Furthermore the Bank of Japan will maintain its bond purchase programme committing to buy ¥80trn ($930bn) per annum of JGBs (Japanese government bonds).
The move is widely seen as a measure to stimulate the Japanese economy via new lending. Negative interest rates increase the costs of reserve deposits at the central bank. Hence commercial banks should be more willing to lend to consumers and businesses where they can achieve a positive return.
The BoJ cut comes amid increasing concerns over the slowdown in China/ SE Asia/ Latin America/ Russia and its impact on the Japanese export sector. In its November financial report, Toyota reported sales in Japan fell 4.4% whilst Asia sales were off 13.4%. 2016 is likely to be a challenging year for Japanese exporters. Especially if China continues its policy of slow devaluation, which increases the cost of Japan’s goods.
Tokyo equities already nursing losses of 10% year to date rallied in response. The Nikkei 225 jumped 487.2 points to 19,683.1 a gain of 2.8%.
This is one of these occasions when the reasons behind the move are of more significance than the move itself or the likely immediate ramifications. A 0.1% cut in the official rate is not going to do much to boost the stagnating Japanese economy which for years has been held back by a rapidly ageing population, a weak property market and ineffective government reforms. The Abe government has yet to address Japan’s budget deficit, which can only be done via higher taxes (which would derail a recovery) – Japan has the distinction of having the world’s highest public debt when measured relative to GDP (2x Gross Domestic Product).
One could read near desperation or panic in that Bank of Japan Governor Kuroda by not hitting inflation targets is now charging off on a move to deliberately weaken the Yen and encourage government overspending. The Bank is clearly concerned about the international slowdown and its impact on the export side, crucial to the performance of corporate Japan.
Overall, this suggests that central banks are on the move again with imaginative measures to stimulate growth via depreciating the local currency. But, it is a classic prisoners’ dilemma, if everyone does it, it falls apart.