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The pluses and minuses of Japan’s negative rates

Japan's surprise move to negative interest rates on Friday is both a “welcome boost” for investor confidence, and in another sense, a failure of policy, sources said.

On Friday, Bank of Japan governor Haruhiko Kuroda gave a positive surprise to global markets by announcing that the country’s base rate would drop to -0.1% in an attempt to generate increased spending and inflation.

“The Bank of Japan’s implementation of negative interest rates is a welcome boost for global investor sentiment and business confidence,” said Kok Wei Yee, portfolio manager at Fidelity International.

“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.”

Although bank and insurance company stocks went down on the news, Yoshimi Hashimoto, portfolio manager at Fidelity, believes the impact on earnings will be slight because the negative interest rate is not applied to current bank deposits at the BoJ.

“I think that the impact of increasing lending will be quite limited as Japanese corporations have enough cash and the lending/deposit ratio is only around 60%. Banks will not increase deposits at the BoJ and cannot increase lending meaningfully, so they are likely to become more willing to buyback equities or buy foreign bonds.”

An empty move?

The action on rates “reflects the lack of options available to tackle the longstanding two-decade long deflationary pressures”, said Sanjiv Shah, chief investment officer at Sun Global Investments. “Abenomics has really hit the limits of effective action.”

“The policies of currency devaluation and monetary stimulus have been well and truly exhausted now and there is little reason to think that negative interest rates will make any difference.”

The yen fell as markets rose, but the BOJ does not intend to start a currency war, said John Vail, chief global strategist at Nikko AM.

“[The BoJ wants] to incentivise domestic business investment and risk taking in Japan, not only by banks, but also by companies and individuals. For banks, they must now choose among two risks: one is to lose money `conservatively’ for their newly accumulated assets, and the other risk is via lending them out.

“Clearly, the latter can have positive outcomes, if implemented correctly, not just for the bank, but also for the broader economy.”

Vail also said that Japan’s QE policy has shown its limitations. “[QE] seems unable to contribute much further to the BOJ’s goal and the size of the BOJ’s balance sheet is already large.” 

Further quantitative easing had been expected, but few investors expected negative rates. 

Vail added that all of the BoJ’s major developments during Kuroda’s leadership have been big surprises.

“[The] BOJ’s decision is not radical and should have been somewhat expected, but it wasn’t, so markets strongly reacted.”

Part of Mark Allen.