Japan introduces negative interest rates

Bank of Japan cuts key interest rate into negative territory

CNNMoney,

29 January, 2016

Japan's central bank is stepping up its efforts to kick-start the country's struggling economy by taking a key interest rate into negative territory.

The Bank of Japan said Friday that it will cut the rate on current accounts that commercial banks hold with it to minus 0.1%, adding that it will push the rate even lower if needed. The move basically means lenders will be charged to keep money with the central bank.

In theory, negative rates encourage banks to lend more and consumers to spend rather than save. They can also weaken a country's currency, helping exporters.

It's a step that the European Central Bank, among others, has already taken, resulting in bizarre situations where banks can end up paying customers who borrow from them. The idea has also been floated in the United States.

The Bank of Japan announcement Friday is the latest surprise move by its governor, Haruhiko Kuroda, in his drive to spur momentum in the world's third-largest economy. He had previously denied plans to take the interest rate below zero.

"Governor Kuroda has gained notoriety by changing course when it is least expected, and today's move will only serve to cement this reputation," said Marcel Thieliant of Capital Economics.

Related: Japan's master of surprise shocks with subzero interest rates

Investors responded positively to the announcement. Stocks in Tokyo rose 2.8% and the country's currency, the yen, fell against the dollar.

Financial markets' turbulent start to 2016 has been particularly punishing for Japan. Prior to the central bank's move, stocks had tanked around 10% in January, and the yen had strengthened.

The plunge in crude oil prices, meanwhile, has made it even harder for the Bank of Japan to hit its inflation target of 2%.

The central bank said the Japanese economy was in the midst of a moderate recovery, but it expressed concerns about plummeting oil prices and the uncertain outlook for emerging economies, especially China.

It's unclear how much difference subzero rates will make to the Japanese economy. The ECB has used them among an array of stimulus efforts, but the euro zone has continued to struggle with deflation.

"With interest rates already at record lows, we do not expect these measures to have a significant impact on the real economy, or inflation," said Izumi Devalier, Japan economist at HSBC.

Related: Japan economy minister to resign over funding scandal

The Bank of Japan's decision to introduce a negative interest rate was also far from unanimous. Five policy board members voted in favor, but four opposed the move.

Japan has long struggled with deflation, and prices have been stagnating despite the central bank's aggressive stimulus measures in recent years that include a massive bond-buying program. It said Friday that it was leaving its asset-purchase plan unchanged.

The bank's moves have come at a time when the government of Prime Minister Shinzo Abe has tried to jolt the economy into life by increasing spending and pushing through reforms. That program took a hit Thursday when Abe's economy minister announced his resignation over a political-funding scandal.

The Bank of Japan's announcement also follows closely watched statements from other major central banks amid the recent market turmoil.

Last week, ECB President Mario Draghi gave stocks a lift by promising that the bank could pump out more money as early as March if necessary.

The U.S Federal Reserve, which raised interest rates last month, said Wednesday it was "monitoring global economic and financial developments."

Peter Boockvar – Japan Just Launched An Economic Kamikaze Against ItsCitizens And The World – Own Gold

January 29, 2016

Peter Boockvar – Japan just launched an economic Kamikaze against its citizens and the world.  Boockvar also issued a warning to the bears in the gold market.

January 29 (King World News) – Art Cashin, Head of Floor Operations at UBS: Overnight And Overseas – Kuroda surprised the world with a decision to get negative on a portion of reserves. (He will charge the banks for excess free reserves that they leave at the BOJ). The move prompts this rant from my friend, Peter Boockvar, over at the Lindsey Group: 

“I only have a few things to say about what Mr. Kuroda and 4 other members of the BoJ decided to do (4 dissented). It’s a tax on money that banks will just pass on to their customers. Wanting higher inflation without faster wage growth is a tax on consumers. And, the BOJ just amped up the global currency battles. I call this economic Kamikaze and I’ll say for the millionth time, I just don’t get the bear case on gold in light of this with fiat currency having such a large bulls-eye target on it. Believing that generating higher inflation is a needed precursor to faster economic growth is nonsense. Inflation reads are a symptom of the activity of the underlying economy. I’ll also repeat the irony that markets love it when the BoJ and ECB further debase their currencies but freak out when the Chinese also want a weaker yuan.”

Art Cashin continues:  “The most violent reaction to Kuroda’s move was in Asia, of course. Tokyo stocks rallied, crashed and then rallied again. Currencies whipsawed. Shanghai, Hong Kong and India all closed higher. In Europe, stocks are up but more moderately so. U.S. futures are higher, as is crude. The yield on then ten year is back below 2%. Japan has had 20 years of quantitative easing and now has to resort to negative rates. I hope Yellen and team are watching.” ***Due to the actions by the Bank of Japan and the subsequent turmoil in key markets, KWN will be releasing interviews all day today.