Japanese negative interest rates a boon for share traders


The Bank of Japan (BOJ) unexpectedly cut interest rates to negative levels. The Japanese central bank’s decision to lower the benchmark rate to -0.1% – published during the early GMT hours of Friday – implies that deposits made by commercial banks will bear interest towards the BOJ. However, because of this cost, the banks might instead be driven to lend more funds to both the private and business sector and hence boost the currently sluggish local economy which is in great need for additional investment and spending. Following the decision, Japanese shares rallied while the U.S. stock markets also increased.

This move has been characterised as “Kuroda bazooka” after the name of BOJ’s Governor Haruhiko Kuroda who is known for his unexpected monetary policy decisions. It has only been a few weeks ago since he announced that there would be no further monetary stimulus introductions to boost the economy and so the latest announcement came as a surprise to the markets.

Japan’s economy has been weak for a number of years and that lead to other negative side effects such as lack of consumer spending. And even though local prices have been constantly falling, Japan even introduced a shopping coupon program in its attempt to lure consumer purchases. The option to introduce negative interest rates was under consideration for many months but the actual decision came during the BOJ’s January meeting and after a tight vote of 5-4. The statement that followed after the meeting said that they will proceed to more interest rate cuts in case its necessary to drive the economy back to a 2% inflation level.

During his press conference, the BOJ Governor unsurprisingly said that the reason behind the introduction of negative interest rates is the sluggish economic growth. He also said that the economy’s recovery is average, while he also estimates that additional decrease in crude oil prices together with the Chinese economy’s growth slowdown might be an additional obstacle towards economic recovery. Only minutes prior the BOJ interest rate decision, the release of a report on Japan’s inflation level showed the December rate to be at 0.1%, much lower than the 2% target.

The introduction of negative interest rates caused Japan’s shares to jump as the Nikkei 225 increased by 4.4% during Friday’s trading session and reached 17,877 points. The Dow Jones Industrial Average rose by 2.3% and also the S&P 500 and NASDAQ composite gained by 2.5% and 2.9% respectively. In contrast, the Japanese yen fell on Friday by 1.1% to just over the 122-level.

It is debatable whether the latest move by BOJ will produce any results. Japanese banks are reluctant to lend money to businesses because they currently don’t see any investment opportunities and have low expectations for healthy returns on investments. The introduction of negative interest rates is not likely to change their perception but it will rather put them in a difficult position. They might however choose to take the risk of lending to local businesses given that it is now costly to keep their funds with the central bank. Will the yen react positively during this interesting week?


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