A global stock market rally inspired by the Bank of Japan’s decision to lower a key interest rate below zero was belied by anxiety over how much ammunition the world’s central banks have left to fight off deflation.
“This is an interesting move that looks a lot more like desperation or novelty than it looks like a program meant to make a real difference,” said Robert Brusca, chief economist at FAO Economics.
While the Bank of Japan move is seen as a baby step—only a small proportion of deposits will be affected—it marks a significant shift. The Japanese central bank joins the European Central Bank and the Swiss National Bank, as well as Sweden and Denmark, in going down the negative-rate path.
‘Feed on the symbolism’
Kit Juckes, global macro strategist at Société Générale, underlined the moment in a note to clients:
“First of all, forget the details, feed on the symbolism. Germany, Switzerland and Japan, the three great current account powers of the post-Bretton Woods era, whose surpluses have financed the frivolity of baby boomer Anglo-Saxons, are being told in no uncertain terms to stop saving.”
Whether the strategy works or not is less important than what the decision says about global disinflationary forces, he said, which have forced the central banks to “set off on this path…following a trail of breadcrumbs as they head for the gingerbread house.”
The move comes as the Bank of Japan struggles to keep the country’s economy from slipping back into deflation.
The Japanese yen USDJPY, +1.95% which had strengthened in recent weeks, retreated sharply. Japanese stocks NIK, +2.80% jumped and global equities, including U.S. stocks rallied SPX, +2.48% helping to blunt somewhat a brutal January performance. See: Stocks end sharply higher, but post worst January since 2009.
U.S. stocks and the dollar were boosted by expectations the Bank of Japan move will make it difficult for the Federal Reserve to follow through with more rate increases this year.
Some economists argue that negative interest rates, which stand as low as minus 1.1% in Sweden and minus 0.75% in Switzerland, appear to be having a positive impact. Former Federal Reserve Chairman Ben Bernanke told MarketWatch in January that negative rates should be part of the central bank’s toolbox if the need were to arise in a serious downturn.
Economists Gabriel Stein and Ben May of Oxford Economics argue that negative rates have so far been a “qualified success.”
Where they’ve been implemented, the policy has “probably reduced bank borrowing rates and long-term bond yields,” they said in a note, though they acknowledged it is hard to untangle the effects of negative rates from quantitative easing and other unconventional policy measures.
But others worry that the move underlines a degree of desperation and a sense that the asset purchases at the heart of global quantitative-easing strategies are running up against some important limits.
‘Rock and a hard place’
In the case of the Bank of Japan, the move shows that policy makers realize that a further expansion of its program of 80 trillion yen ($666 billion) a year in government bond purchases would be difficult to execute given the need for banks and other institutions to hold on to some Japanese government bonds for collateral and asset-liability matching purposes, wrote Grant Lewis and Chris Scicluna, economists at Daiwa Capital Markets.
“So, the BOJ seems to have found itself between a rock and a hard place—up its target for JGB purchases and risk missing it, or introduce negative rates, threatening the achievement of even its current JGB purchase program,” they said, in a note.
Instead, the bank is trying to steer the middle ground by introducing a negative interest rate on a small proportion of reserves—”that isn’t really a negative rate at all,” they said, noting that the negative 0.1% rate will apply only to the subsequent increase in banks’ current account balances, ensuring that on average, more than two-thirds of reserves will continue to earn 0.1% interest while a sizable remainder earn 0% over the coming year.
But the Daiwa economists and others expect the Bank of Japan to remain under pressure to ease further. And when push comes to shove, the bank will be likely to push rates further into negative territory rather than ramp up asset purchases.
“Ultimately, negative interest rates from a veteran of monetary expansion such as the BOJ mark a capitulation about the effectiveness of QE alone as an inflation-targeting tool in world of lingering growth-debt imbalances and commodity price wars,” said Lena Komileva, economist at G-plus Economics, in emailed comments.
‘Ultimately, negative interest rates from a veteran of monetary expansion such as the BOJ mark a capitulation about the effectiveness of QE alone as an inflation-targeting tool in world of lingering growth-debt imbalances and commodity price wars.’
Lena Komileva, economist at G-plus Economics The move, meanwhile, weighed on Japanese government bond yields. Maturities out to eight years are now in negative territory, making for a “dangerous set of circumstances,” said Carl Weinberg, chief economist at High Frequency Economics.
Banks will presumably move their deposit rates below zero in response, which will leave life insurers, pension funds and even individuals with no incentive to sell Japanese government bonds to the Bank of Japan, he said, in a note.
The central bank “is approaching a situation where it cannot stop buying bonds—to do so would defund a government that has no other major buyers of its paper other than the BOJ—and where it cannot find enough bonds to buy, other than all the new issuance of the government,” Weinberg wrote. “This is a predicament. We do not know how it ends.”