In shocking move, Japan adopts negative interest rate as deflation fight falters

Japan Times ^ | Jan 29, 2016

[TigerLikesRooster]

In shocking move, Japan adopts negative interest rate as deflation fight falters

The Bank of Japan unexpectedly adopted a negative interest rate policy Friday, stunning investors with a move aimed at shielding the country's sluggish economy from volatile markets and slowing global growth.

The BOJ said it would use a three-tiered system to charge for excess reserves parked with the institution, an aggressive policy pioneered by the European Central Bank that penalizes banks for holding cash and encourages them to loan it out.

"The BOJ will cut the interest rate further into negative territory if judged as necessary," the central bank said in a statement announcing the decision.

Sliding oil prices and the murky global economic outlook are "raising fears of a negative impact on Japanese companies and the conversion of the deflationary mindset," BOJ Gov. Haruhiko Kuroda told a news conference later in the day.

The surprise move sent markets gyrating, with the yen falling sharply and the Nikkei stock index jumping 2.8 percent to close the day's trading at 17,518.30 amid concern over the outlook for the global economy, China's slowdown and the collapse of crude oil prices.

The yield on the benchmark 10-year Japanese government bond, the yardstick for long-term interest rates, fell to a record-low 0.090 percent at one point, marking the first dip below 0.1 percent on record.

The surprise decision came after slumps in household spending and output for December were announced the same day, underscoring the fragile nature of the recovery.

Bank shares tumbled in response. Mitsubishi UFJ Financial Group Inc., the nation's biggest bank, fell as much as 8.8 percent, Sumitomo Mitsui Financial Group Inc. slid as much as 6.6 percent and Mizuho Financial Group Inc. dropped 5.2 percent, although they recovered from lows by the close of trading in Tokyo.

Kuroda said last week that the central bank was not thinking of adopting a negative interest rate policy and told the Diet that further easing would likely take the form of an expansion in its massive asset-buying program. But in a 5-4 vote, the BOJ Policy Board decided to charge 0.1 percent interest starting Feb. 16.

The three-tier system will apply to financial institutions' current accounts and is similar to programs adopted by some central banks in Europe, the BOJ said, explaining that:

Existing balances will continue to have a rate of 0.1 percent. This will be called the Basic Balance.

A rate of zero percent will be applied to the reserves that institutions are required to keep at the BOJ, and also the reserves related to its various lending support programs. This is called the Macro Add-on Balance.

A rate of minus 0.1 percent will be applied to any reserves not included in the first two tiers. This is called the Policy-Rate Balance.

With the bulk of banks' reserves still receiving a positive 0.1 percent rate, this could help to contain any negative spillover effects, such as earnings damage that would undermine lending and growth.

Also, the BOJ delayed the timing for achieving its 2 percent price target to around the six months starting in April 2017, the third postponement in less than a year. It now sees inflation rising 0.8 percent in the 12 months starting this April, down from a previous forecast of 1.4 percent.

The BOJ said the move was aimed at forestalling the risk of global financial turbulence that could hurt business confidence and revive the "deflationary mindset" it has been striving to wipe out with aggressive money printing.

"Kuroda had been saying that he didn't think something like this would help so it is a bit surprising and it's clear the market has been surprised by it," said Nicholas Smith, a strategist at CLSA based in Tokyo.

"The banking sector is getting smoked right now, though everything else seems to be doing just fine. This has obviously had a big effect on inflation and on inflation expectations."

The ECB became the first major central bank to go negative in June 2014.

The BOJ meanwhile maintained its pledge to expand the nation's financial base at an annual pace of ¥80 trillion by aggressively purchasing Japanese government bonds and risky assets under its unorthodox quantitative and qualitative easing program.

Markets have been split on whether the central bank would ease policy amid slumping oil costs and soft consumer spending that have brought inflation to a halt.

In a quarterly review of its forecasts released the same day, the BOJ cut its core consumer inflation forecast for fiscal 2016 to 0.8 percent from 1.4 percent projected three months ago.

But it now expects inflation to accelerate to 1.8 percent in fiscal 2017 ending in March 2018, after taking into account the effect of Friday's measures.

Analysts pointed out that the BOJ is running out of room to maneuver with its QQE program as it is quite simply running out of assets to buy.

"I think this is a regime change and the BOJ's main policy tool is now negative interest rates," said Daiju Aoki, an economist at UBS Securities in Tokyo. "This shows that the ability to buy more JGBs is limited."

Inflation of just 0.1 percent in the year to December revived expectations for the BOJ to eventually deliver more stimulus.

Many BOJ policymakers have been wary of using their diminishing policy tools to counter what they see as factors beyond their control, such as volatile financial markets and China's slowdown.

But pessimists on the BOJ board have worried that slumping Tokyo stocks may discourage firms from boosting capital spending, threatening the positive momentum it is trying to create with its aggressive money-printing program. STAFF REPORT

Japanese savers faced the shock of negative interest rates on their bank balances on Friday, as the Bank of Japan's monetary policy committee took the unprecedented move to get the nation spending.

Five of the nine members of the BOJ Policy Board were in favor of the rate of minus 0.1 percent. The news followed a two-day meeting by the board.

The yen weakened sharply on the news as currency traders sold up. The Nikkei stock average gained a swift 1.1 percent as trading resumed after Friday's lunch break.

Negative interest rates punish banks for holding cash. This encourages them to get rid of it in the form of loans, which aids businesses and people looking to buy a home.

It was the BOJ's first move on its benchmark move in five years.

Meanwhile, the bank decided not to expand its monetary easing, but said it has not ruled out doing so later. The Policy Board meets again in March.

The BOJ is aiming for 2 percent inflation, but deflationary pressures such as low oil prices threaten that goal in the near- to mid-term.

[TigerLikesRooster]

P!

[Monty22002]

Man I wish I had big cash to put into a negative rate. :(

[Paul R.]

I think I read it here, a few years ago:

Japan’s economy is a bug in search of a windshield.

[alloysteel]

Like anyone has any incentive now to put any amount of cash with any bank. Storing it in your mattress makes more sense right now.

When money can no longer make money, eventually the incentive for banks to lend out money shall collapse altogether, and the whole system of investment grinds to a halt. Money lending becomes the province of loan sharks, who lend out at horrendous rates and have a rather firm collection policy. And, oh yeah, are notoriously free of regulation. Sort of a “non-bank” investment enterprise.

There is a black market for money, just like any other commodity.

[Monty22002]

I don’t think Japan is in danger of defaulting. The best thing would be to take as big of a loan as possible, since they are paying you to take it. Invest it in a mutual fund or money market. If you had millions, you could make tens of thousands per day.

[exDemMom]

This makes absolutely no sense whatsoever as fiscal policy. Or as any other kind of policy, for that matter.

Maybe the problem is that people have become convinced that government is all-powerful to control the economy, and it just isn’t true. So the government affects the economy the only way it can, negatively, and people think it knows what it’s doing.

[central_va]

Maybe they should invest in aircraft carriers.....

[grania]

Not only everything you said, but when money can no longer make money, there is no incentive for folks to save for future needs. The middle class can NEVER come back if people who are responsible about their finances can't accumulate some wealth.

Lower means people have actually had negative interest rates for years. The fees they pay on accounts without a balance beyond their means eat up any chance they have of getting ahead.

The other factor is when people don't trust their gov to not mess with their assets, those assets will be hidden. All that talk about retirement funds ending up in the hands of gov to manage them as annuities is pretty scary.

[SkyPilot]

This makes absolutely no sense whatsoever as fiscal policy

I believe it is a push from the elite to eliminate cash altogether, on a global scale. Cashless will allow them to tax and to monitor every single financial transaction - from you buying groceries, to a new suit, to ammo for your guns.

We are rapidly moving towards the time of the Antichrist. Under his hellish reign, the entire population of the world will be required to have a mark on their hand or forehead in order to conduct any financial transaction, including buying food and water.

When the next Big Crash happens (who knows when that will be, but the signs are ominous), the world will be in total financial chaos.

I believe we will move towards a single global currency, possibly backed by the IMF using the SDR.

[Alberta's Child]

Not only everything you said, but when money can no longer make money, there is no incentive for folks to save for future needs. The middle class can NEVER come back if people who are responsible about their finances can't accumulate some wealth.

I'm not sure this is really a financial problem. Real wealth doesn't exist in cash, but in assets that can be used productively and/or can grow in value. Interestingly, it's much easier to build "wealth" with cash in a deflationary environment than at any other time -- since the nominal value of the cash will grow even if you just bury it in your back yard.

How quickly we forget that inflation, not deflation, erodes the value of money over the long term.

[ShadowAce]

...since they are paying you to take it.

They are NOT paying you to take it.

They are now charging YOU interest on your savings accounts. They are no longer paying you interest on savings/investments.

[Monty22002]

Correct, you would not want to have a savings account there.

BUT, you WOULD want to take a maximum amount loan right now, they are paying you to take one.

[exDemMom]

Right—in a cashless society, how is big crime supposed to operate? I see that as a major obstacle to any move to a cash-free society.

Besides, negative interest has a negative effect only on electronic money. The paper money in your pocket is not affected.

[ShadowAce]

No—they are NOT paying you to take out a loan. They are still charging you interest for that loan.

[Monty22002]

What are they charging for that loan? A negative interest, which means they are paying you to take that loan.

[ShadowAce]

Nope. Negative interest only applies to holdings within the bank—not to loans made by the bank.

[babble-on]

If all interest rates really were negative (as opposed to just an interbank reference rate like the BOJ’s today) then the best riskless asset would be physical cash.

That’s why they have the idea of the monthly stamp (Gesell), where in an extreme case you would have to buy a stamp each month to affix to the front of your currency. That way it, too, would have a holding cost.

[WKUHilltopper]

Wow! A negative interest rate?? That’s insane. Hope they have lots of coffee cans in Japan so people can deposit their money.

[WKUHilltopper]

I think you’re right. They want “digital” money. Once they have it, all they have to do is “flip a switch” and cut you off from life (unless you know how to ‘run a trout line and skin a buck’). Digital money will be the muscle of the ‘mark of the beast’.