Three thoughts on the surprise negative interest rate policy by Bank of Japan (BOJ).

  • On its 29 January meeting, the BOJ governor, Haruhiko Kuroda, surprised the markets with the introduction of negative interest rate on a portion of excess reserves.
  • Kuroda has also stated that there is “no limit” to monetary easing.

Three-year chart of Nikkei Index

 3 yr chart of Nikkei

Source: Bloomberg

  1. Negative interest rate policy

The BOJ introduce a three tiered interest rate policy and it will take effect on 16 February:

  1. 0.1% on basic balance – this includes the average amount of existing current accounts held during the reserve maintenance periods in 2015.
  2. 0.0% on macro add-on balance – this includes the sum of required reserves, the amount of credit provided through the Loan Support Program and other facilities, and a portion of the required increase for achieving the target base money growth of ¥80tn a year.
  3. -0.1% on policy rate balance – this includes surplus balance after taking into account items a & b.


    2. Pushing on a string

By resorting to negative interest rate, BOJ is acknowledging that they need more tools in addition to the already massive Quantitative Easing (QE) programme. However, this is akin to “pushing on a string” as it appears that monetary policy is no longer effective to inducing consumption. The demand for loans and capex spending has remained weak despite massive monetary easing by BOJ. As of Q3 2015, Japan’s private sector saved a net 6.7% of GDP in the past year. This is despite near-zero interest rates as the Japanese businesses and households are focused on saving more instead of consuming more. As suggested by Richard Koo of Nomura, interest rates become no longer relevant once people are traumatised after the collapse of a debt-financed bubble. Thus, low interest rate has failed to produce the necessary lending growth and Karuoda’s massive monetary easing policies may be ineffective in stimulating the economy.

     3. Awash with liquidity

On the positive side, a negative rate policy will continue to trigger a wave of liquidity into the financial markets. This is because banks will bid up other assets in the financial system and avoid the penalty of holding a portion of excess reserves. Kuroda has signal his determination to stimulate the economy by stating that there is “no limit” to monetary easing in his first speech after the surprise cut in interest rate. Therefore, we believe that the primary beneficiaries of the liquidity outflows from Japan will likely be yield instruments such as Asia corporate bonds (especially Singapore and Indonesia bonds), Asia Telcos and Singapore REITs.

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