Bank of Japan Governor Haruhiko Kuroda signalled on Monday that the Bank is in no rush to cut rates further into negative territory. Kuroda said at a speech in Tokyo that the Bank of Japan will want to monitor the effects of negative interest rates which it introduced in January before cutting them further. The remarks point to a bit of a turnaround for Kuroda who had been indicating since the January decision that rates are likely to be reduced further.
The Bank of Japan shocked markets in January when it unexpectedly cut the interest rate on some current accounts held by financial firms at the central bank into negative territory from 0.1% to -0.1%. The move temporarily pushed the yen lower against other currencies, triggering a 5% rally in Japanese stocks. However, the effect didn’t last long as a fresh round of turbulence rocked global financial markets and risk aversion set in, increasing demand for safe-haven assets such as the yen This drove the Japanese currency to its highest against the dollar since October 2014 as the dollar dropped over 8% to below 111 yen. Stocks also fell back, with the Nikkei 225 index sliding 16% in two weeks before making a partial recovery.
In his speech, Kuroda defended the Bank’s negative interest rate policy arguing that negative rates should reduce the incentive for financial institutions to exchange government bonds for current accounts at the BoJ. Forcing banks to instead lend out the money should make the BoJ’s quantitative and qualitative easing (QQE) program more effective. Kuroda added that the combination of QQE with negative rates should benefit individuals and businesses and help the country defeat deflation. However, he also acknowledged that negative rates may have some adverse impact on banks’ earnings.
Market reaction to the speech was limited as the dollar was already in retreat from Friday’s highs at the start of trading on Monday. The dollar was back below 114 yen and stood at 113.56 yen at 12:00 GMT. Meanwhile, Tokyo stocks ended a 4-day winning streak to close 0.6% lower on Monday.
The Bank of Japan has come under fire over its negative rates policy as markets have so far judged it to have failed in boosting stocks and weakening the yen. The central bank has already had to push back its forecasts several times of when it expects to achieve inflation of 2%. Some analysts expect the BoJ will again lower its growth and inflation outlook in its next quarterly report in April.
But further easing is looking less likely for the moment as the economy appears to be weathering the latest economic storm reasonably well and divisions within the Bank’s policy board on the need for more stimulus make such a move more difficult. January’s cut in rates was approved by a tight margin of 5-4 and many board members are uncomfortable with increasing the size of the already massive QQE program further.
The wait-and-see approach however, did not stop Kuroda from reiterating the Bank’s readiness to adjust policy if necessary. He also attempted to dispel concerns that QQE cannot be expanded further if needed.
Today’s comments are more likely to create confusion in the BoJ’s policy than to settle any market concerns. Even if further easing is ruled out in the near future, uncertainty remains on the future direction of monetary policy in Japan as the central bank could yet surprise markets with policy adjustments if inflation fails to rise towards the 2% target by 2017. The lack of policy direction by the BoJ is more likely to drive the yen up than down, especially now that the dollar rally has paused and risk aversion keeps making a comeback.
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