Posted on 01/29/2016 3:27:36 AM PST by 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.
Well, that’s for the bigwigs dealings. If it were a true negative interest rate, you’d get cash back for every loan you took. That’s something they’d probably not want, but it’s possible.
In this case, it appears they may be on the borderline to do just that. At the very least, you have nearly 0% rate loans. It’s possible they’d go slightly negative and you’d be paid on your loan.
There have been plenty of reports that the middle class is on its way to extinction in the US. The strength of the US and most any vibrant economy is a confident middle class.
The rate is for deposits, not loans.
This is eventually coming to American and no one should be surprised—it’s all part of the plan. Negative interest rates solve quite a few problems for the Government. The biggest plus would be that they, literally, make $$ for going into debt. It would also goose the average Joe into moving their $$ into either stocks or corporate/municipal bonds. This is also part of the plan, as it would prop up asset prices.
Most people will be mad as H@ll to be charged a percentage to keep their $$ in the bank, but what choice will they have if they want to preserve their wealth? Make no mistake, NIRP is a back door tax.
So, following this to its logical course, a time comes when all our cash is in our homes, under the mattress, next to our gold. Then one day, the government makes the current currency obsolete and gives us 2 months to turn in the old bills for the new ones after which time the old ones are worthless. BTW, the exchange rate will be $1,000 in old money for $10 in the new bills. At the same time, we will be commanded to turn in all gold under threat of confiscation without compensation after 6 months, with special, armed recovery teams with sweeping powers of intrusion waiting by the phone of the anonymous tip line.
Think it can’t happen? It has been done before.
Except for the Government. Under NIRP, the Government will make $$ on its bonds. In a deflationary environment, people will be forced to pay a fee to preserve their cash.
With NIRP, people will also be very tempted to stuff their $$ in a matress.....or a safe.
Basically, this will be a disaster for the Economy. However, it will give Government more running room to spend and redistribute wealth. Which is the main goal.
Cash beyond the basic balance will be shipped offshore via tokyo offices of american or singapore banks
There are 300 million guns in U.S. I doubt that things will be so easy for gum-int.
Instead of fixing their problems, they kept kicking the can down the road, starting about 1991. They’ve been stuck in the pattern ever since.
The US adopted the same basic policy in 2008.
I would like to agree with you, Tiger, but in USA, during the depression, our gold WAS called in, allowing us only 1 ounce. And, the money WAS exchanged for new bills. Not at a 100 to 1 ratio, I admit but it was in Venezuela and other countries recently. In addition, the ratio was increased after the people exchanged the first $100 thousand. Instant equality for everyone as we all become broke. Nationalize the real estate and the job is complete.
Like Amazon make up the loss on volume. Japan is our future. They played the game longer with a high national savings rate and strong export market. Their elderly population is needing their savings back and exports are no longer driving the economy. What is their debt to GDP now something like 240%? at least the Japanese people will not be in the streets looting and burning.
No this is a negative charge against savings with a 2 tier system.
Hold a large balance and it will be like a Mutual fund taking x % for management services.
I know. Remember those nice lines after the Tsunami when everyone was waiting for food ns water?
Contrast with the Superdome after Katrina.
Digital money as in credit card use- where no physical cash changes hands.
I know people who do not use cash money for anything- either credit card or debit card for all purchases.
Actually using cash money - one needs to actually think about purchasing power.
The advent of direct deposit is another mark of the beast in my opinion. Again if you do not actually ever have actual money- just goes into account where you then remove using debit card or credit card.
Also the ELF for paying billsanother one- setup the payment then it just goes out of the account.
Why is this shocking?
Japan is entering it’s third decade of these sorts of monetary games.
That’s been the plan.
“Actually using cash money - one needs to actually think about purchasing power.”
Yes. I agree. Kinda like why they use chips in lieu of money in casinos. You don’t think of a chip in terms of a dollar—just a chip.
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