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On 29th January this year the Bank of Japan (BOJ) announced that it was adopting negative interest rates as a way of stimulating the Japanese economy. With effect from 16th February (yesterday) financial institutions would be charged 0.1% for lodging excess reserves with the BOJ. In this way it was hoped that more money would flow back into the economy as deposit takers lent out these funds in the hope of earning a return on their money. Obviously, these institutions won’t enjoy being charged for the privilege of parking funds overnight with their central bank. However, that may be preferable to lending to companies who are operating in a low growth environment where the return of capital could prove a problem. Nevertheless, that’s what commercial banks are for.

It would be an understatement to say that the BOJ’s decision to go negative was a surprise. After all, on the 21st January Governor Haruhiko Kuroda told the Japanese parliament that he wasn’t considering NIRP (Negative Interest Rate Policy). But nevertheless, Japan now joins the Euro zone, Switzerland, Denmark and Sweden with negative rates. Last week US Federal Reserve Chair Yellen was forced to admit that it was something that the Fed was looking in to – if only as an academic exercise.

It may take some time to see if NIRP proves to be the answer to tepid global growth and deflationary pressures. But one thing was for sure, the Japanese yen didn’t behave as expected. After an initial sell-off (green bar circled in the USDJPY chart below) the currency subsequently roared higher. Poor Mr Kuroda. In the words of Bjork when she sang with The Sugarcubes: “This wasn’t supposed to happen.”

Much of the move was attributable to the sell-off in risk assets and equities in particular. But once again, that’s not exactly the standard reaction to monetary easing. Exhibit 2, the Nikkei (4-hour chart), below:
  


One of the dangers of unconventional monetary policies (quantitative easing, negative interest rates) is that their ability to boost investor risk appetite diminishes over time. Another is that unconventional policies can have unintended consequences, or, may not work out exactly as their implementers expect. One thing is for sure, if I lend a bank my money by depositing it with them, I’m taking a risk. I don’t expect to be charged for the privilege. But no doubt that too will happen.

  
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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin

Category: PM Bulletin


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