The Bank of Japan decided to keep monetary policy unchanged at today’s meeting as expected, holding the interest rate on some current accounts held at the Bank at -0.1%. The decision follows confusion and criticism of the Bank’s negative interest rate policy since its introduction in January.
The Bank had strongly signalled at its January policy meeting that it will “cut the interest rate further into negative territory if judged as necessary”. This was also reiterated by the central bank governor Haruhiko Kuroda in subsequent statements, raising expectations that the interest rate applied on certain current accounts held by financial institutions at the BOJ would fall further into negative territory.
However, the policy has come under strong attack from financial institutions and politicians in Japan over the effectiveness of charging negative interest rates. The main concern by the banking sector of negative interest rates has been about its potential impact on earnings.
The market’s reaction has also not been as expected. The Japanese yen initially fell sharply after the surprise move in January, depreciating to 121.68 yen per dollar. But traders soon started to doubt the usefulness of such a policy and the yen has since appreciated again. The US dollar recently fell below 111 yen for the first time since October 2014. It has since rebounded but has not been able to advance much beyond 114 yen. Japanese equities have also fallen back as the yen’s losses proved short-lived.
In today’s meeting statement, the BoJ omitted the bias for further cuts to interest rates to negative, which some suspect may be in response to the criticism it faced. Kuroda recently appeared to backtrack on the need for more cuts to the interest rate, saying the Bank will monitor the effects of its recent measures before taking further action. Another change in today’s policy review was to exempt money reserve funds (MRFs) from the negative rate and instead apply a zero rate in order to lessen the impact of negative rates on earnings.
Despite not specifically referring to the need of further cuts, the Bank sounded less optimistic about the prospects for inflation and growth. Weaker growth in emerging markets is currently weighing on exports and industrial output. Inflation is also expected to remain low at around 0% before starting to accelerate but only at a very moderate pace. The Bank also noted that while longer-term inflation expectations have been rising, shorter term expectations have weakened recently.
The gloomier outlook could be a sign that the BoJ is moving closer to easing monetary policy in the coming months. Many economists are forecasting that the Bank will loosen policy at its April, June or July meeting. With further reductions to interest rates to negative proving controversial, the Bank may instead opt to increase the size of its already massive asset purchase program, which currently stands at 80 trillion yen annually.
Such a move is likely to lead to the depreciation of the yen and help reverse the 8% gain it’s made against the dollar since mid-December. In the meantime though, the combination of safe-haven flows arising from the current market volatility and uncertainty about BoJ policy is keeping the upwards pressure on the Japanese currency.
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