The Bank of Japan took markets by surprise on Friday by introducing negative interest rates and cutting its benchmark rate from 0.1% to -0.1%. The negative interest rate is to apply to current accounts that financial institutions hold at the central bank. The Bank signalled further easing by saying that “it will cut the interest rate further into negative territory” if necessary. The decision was split however with a 5-4 vote.
The Bank slightly revised up its forecasts of GDP growth in 2016-17 but lowered its outlook for inflation. Figures out today showed headline inflation fell by 0.1% to 0.2% in December and core inflation was unchanged at 0.1%, making it harder for the Bank to achieve its 2% target by October 2017.
In other data out in Japan today, household spending remained sluggish by increasing by a smaller-than-expected 1% month-on-month rate in December. Expectations were for a rebound of 2%. Industrial production also disappointed as it fell by 1.4% month-on-month in December, much weaker than forecasts of a 0.3% decline.
The yen fell against major currencies after the shock decision as Governor Kuroda had rejected the idea of negative rates just last week. The greenback jumped by around 2.5% to 121.41 yen but had eased to 120.57 yen in late Asian session. The euro soared to 132.29 yen before settling around 131.50 yen.
The single currency was also weaker against the dollar today as it slipped to 1.09 dollars in late Asian trading after climbing to 1.0967 dollars yesterday on weak US data.
The pound was testing the 1.44 handle against the dollar and was last trading at 1.4372 dollars. Sterling was boosted yesterday by the preliminary GDP estimates for the fourth quarter that showed the UK economy maintained moderate expansion.
Coming up later today, Eurozone flash inflation figures are out for January, followed by the initial estimates of US GDP growth in the fourth quarter.
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