The Bank of Japan's surprise election of limited negative deposit rates has accomplished a rapid devaluation of the yen. It is unlikely to achieve much else.
The yen has fallen more than 2 percent against the dollar, the euro and the yuan, yet the Japanese currency remains a good deal stronger than it was in the middle of the summer.
Japanese exporters will be grateful for the help of a cheaper currency but Japanese consumers will have to pay more for imported goods and services. Whatever GDP boost is given by manufacturers' faster sales will be countered by slower and more expensive domestic consumption.
Unfortunately for the Bank of Japan, it is not alone in its policy choices. The European Central Bank and the People’s Bank of China are also bent on using monetary policy to support their economies. Both banks have made recent moves to loosen liquidity and have said they will do more if needed.
The U.S. Federal Reserve, the only major central bank raising policy rates, is beginning to question the wisdom and possibility of its own projected 4 quarter point increases this year in the face of deteriorating domestic and international economic conditions.
The BOJ move will be tempered into oblivion in the coming months by the actions of its banking colleagues around the world. If everyone is reducing interest rates, no one is reducing rates.
Whatever their individual desires, the world's central bankers cannot create a race to the bottom in negative rates without panicking the world's markets and wrecking what little confidence in the global economy is left after the disastrous beginning to the year.
Japan's main policy rate, the overnight call, has been below 1.0 percent since August 1995. With the briefest of exceptions it has been below 0.5 percent since that October. In those two decades the Japanese economy has grown an average of 0.8 percent annually and experienced five recessions. What other proof is needed for the futility of a monetary policy of permanent low interest rates?
Why would the Bank of Japan double down on a policy whose failed record over two decades is clear?
Modern central banks have essentially one tool for economic influence, interest rates.
Even though that tool is ineffective and dangerous at the zero bound and its record of failure is indisputable, the banks are enjoined to act by their mandates, by their activist economic philosophy, by the expectations of their countries and the policy abdications of government.
It would be far better for the BOJ to do nothing than to give Japan’s political establishment another pass on economic reform and further the damage caused by falsifying the price of an economy's most basic ingredient, money.
But that, it seems, is the one thing the BOJ and the rest of the world’s central banks just cannot do.
Chief Market Strategist
WorldWideMarkets Online Trading