The Disturbing Reasons Why The Bank Of Japan Stunned Everyone With Negative Rates

Tyler Durden's picture

As we noted earlier, in a paradoxical U-turn, one which caught everyone by surprise as a result of Kuroda's own promise just one week ago not to engage in NIRP...


... and two months after the ECB's December 3 disappointing announcement led to a historic surge in the EUR, today countless macro hedge funds have been left reeling with huge losses once again, as many had recently turned bullish on the Yen...

... only to be eviscerated by the BOJ's negative rates announcement.

So what happened? Reuters has an amusing take, one which we doubt many macro HFs will find quite entertaining:

Bank of Japan Governor Haruhiko Kuroda used classic shock tactics on Friday to push through his latest unconventional monetary policy of negative rates: deny, then strike.

The paradox, of course, is that by "striking", Kuroda slammed precisely those who were meant to benefit the most from the BOJ's action: financial institutions. To be sure, it is not just hedge funds who will be left reeling but Japanese banks themselves, because as a result of negative rates, their NIM will go horizontal and lead to even more pronounced losses, something European banks - such as Deutsche Bank - have discovered the hard way over the past year and a half.

There are other problems with the BOJ's seemingly chaotic, if not panicked, decision: as Reuters adds, "a razor-thin 5-4 vote underscores the difficulty Kuroda had in winning enough board backing for his shock tactic, and illustrates the doubts among board members about the governor's line that by sticking to a 2 percent inflation goal the BOJ can make people believe prices will rise."

In a note released this morning, Goldman itself warns that it has "concerns" about Kuroda's act, the key one being that while it crushed many market participants, the BOJ's action will have no benefit for the actual economy (and in fact it will end up hurting banks whose NIMs are about to pancake):

... we do have concerns about the policy transmission channel. Policy Board Member Koji Ishida, who voted against the new measures, said that “a further decline in JGB yields would not have significantly positive effects on economy activity.” We concur with this sentiment, particularly for capex. The key determinants of capex in Japan are the expected growth rate and uncertainty about the future as seen by corporate management according to our analysis, while the impact of real long-term rates has weakened markedly in recent years.


Of interest to us was the growth and inflation forecasts in the Outlook for Economic Activity and Prices (Outlook Report) also released on January 29. As we expected, the BOJ cut the FY2016 core CPI outlook to +0.8%, from +1.4% in October, but other growth rate and price outlooks were largely unchanged. The future benefits of changing to this historical policy regime (i.e., introducing a negative interest rate) were hardly factored in by the Policy Board despite the above explanation of the policy transmission channels made by Governor Kuroda.


In our view, this suggests that the BOJ intended to affect the expectations of forex market participants with a bold and surprising announcement. As we mentioned above, Governor Kuroda had continuously rejected the possibility of cutting interest rates in the Diet and other public forums until only recently. Governor Kuroda may have spotted a chance to surprise at the January 29 MPM having seen a substantial decline in market expectations for an interest rate cut as a result of this. He declared that the BOJ is prepared to lower the interest rate further into negative territory if it decided this was necessary, and introduced examples of countries with large negative interest rates such as Switzerland (-0.75%) and Sweden (-1.1%). We believe this was also intended to keep expectations alive in the forex market going forward.

Translated, this means that just like China's central bank, which in recent weeks has been panicking over how to scare currency speculators away from shorting its currency too far, and thus unleashing a surge in capital outflows (which as we wrote yesterday are estimated to have hit a near record $185 billion in January), the BOJ is likewise scrambling to prevent aggressive shorting of the JPY, and now that it has unleashed NIRP will use it as the "backstop bazooka" that can be used at any given moment when the USDJPY gets too low, spooking speculators and other hedge funds who have ironically been the biggest beneficiaries from BOJ policies.

But how did Draghi get the idea to engage in NIRP specifically as the? Reuters writes that it all started precisely a week ago: on Jan. 21, a day before flying out for the annual World Economic Forum in Davos, Kuroda told Japan's parliament he was not considering negative interest rates. But he quietly told his staff to come up with several options in case the BOJ eased."

Of course, our staff knew that several central banks have adopted negative interest rates, so they've been analyzing the step for some time," Kuroda said at a news conference on Friday. "They raised it as one of the options, which we discussed at today's meeting."


By the time Kuroda returned from Davos, BOJ staff were ready to propose negative rates, taking a leaf from the European Central Bank's book. "The ECB showed that combining QE and negative interest rates can work," one BOJ official said. "It was just a question of overcoming some technical difficulties."

Which at least superficially makes sense: one can be wrong, but if the right intentions are good - it can be excused. But the punchline that should leave everyone speechless is that it wasn't even the right intention. Instead, it was this:

People close to Kuroda say that Davos - where he mingled with central bankers such as ECB President Mario Draghi and leading company executives - likely prompted him to pull the trigger. "Davos is really important. Many central bank governors change their perception of things there," said one central bank policymaker who has regular interaction with Kuroda.

In other words, it was peer pressure by other, just as desperate central bankers, that forced Kuroda to act!

Actually, it's even worse than that, because that is just half of the story. Here is the other half, again thanks to Reuters:

"When stocks are falling this much, it's hard to justify not acting," said one of the individuals, who has occasional contact with Kuroda.

And there you have it: stocks are dropping, so central banks must intervene, just as they have done from day one. Just as Draghi did most recently on December 4 when asked if his speech was meant to talk up markets: recall the exchange: "was today's speech deliberately designed to try offset some of the reaction yesterday?" to which Draghi's response was legendary: "Not really... well, of course."

This was followed by loud laughter, and why not: Draghi had succeeded in pushing stocks higher, if only for the time being.

Just like Kuroda has done today. Alas, just like in December, the laughter won't last. First, as MarketWatch notes, "The move does speak to a certain degree of desperation."

Finally, there's this disturbing bit from Goldman's take of the BOJ's decision:

Regarding the Introduction of Supplementary Measures for Quantitative and Qualitative Monetary Easing announced at the December 2015 MPM, we believe the BOJ thinks that JGB purchases will have reached their technical limit in quantitative terms eventually, and it is highly likely it was a last-ditch measure to somehow maintain the current pace of purchases for some time. If not, we would have expected the BOJ not to introduce a negative interest rate this time either and to have opted instead to further increase JGB purchases.

And when none other than Goldman Sachs says the Bank of Japan engaged in a "last-ditch measure" it may be time to panic.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Chuckster's picture

I think they are just plain sneaky...

Soul Glow's picture

Deny then strike, also known as lying, a bankers most used policy.

clooney_art's picture

Stocks is the new Guns and Butter.

CounterPartyVice's picture

They should just buy all stocks outright and bring the price to infinity with unlimited credit lines and wipe out all other peoples savings in the process. #communism

Thought Processor's picture



They already are buying stocks outright.  They've been doing this for a while, openly, probably longer covertly.  It's estimated that the Japanese Gov via the treasury and central bank now own over 40% of Japanese equities.  Which begs the question now-  are they propping their market up via negative interest rates in order to protect their positions?  The conflict of interests as well as the moral hazards here are off the charts.  At this point they are simply trying to keep the wheels on the bus for as long as possible.


It is likely that the Governments of all major western economies are now active in the markets, proping and buying where necessary.  This is not news.  US, EU, China all have working market teams.  


But something's not right with Japan.  It seems that this long simmering pot is about to boil.  This is worth watching because they are leading everyone through this mess by virtue of being the most overextended of any major economy.  


Through the gates of hell the first they will be. 





CounterPartyVice's picture

I can only agree with this. Based on that, any market crash can only be temporary and short lived. The end game is hyperinflation where they can't control the prices of commodities, base and pm.

Let's see where Japan heads us.

NidStyles's picture





SuperRay's picture

Time for hari kari via nail gun

back to basics's picture

What they can't eventually control with all this money printing, and this is when the average Joe will awaken, is the price of food. 

Syrin's picture

We all know this was caused by the recent Godzilla forecast.   Oh sorry, Godzirra.

Tarzan's picture

Hyper inflation happens when the People have no alternative, no resources, NO GUNS! 

I think there's a limit to what people will pay, they'll find alternatives and then they'll revolt before the banks can ever succeed in inflating their debts away. 

Mostly because the debt is so high that even if the People were that placated, to pay half their income to eat, the Banks would still fail to dig out of debt, the economy will continue to seek bottom, fake price will continue to be pressed down!

CC Lemon's picture

Hyperinflation, at least on a street level, can't really happen unless the people spending, on the street level, keep getting more money to prop up the prices. 

That's going to be tough with half the country dependent on food stamps. If food prices ONLY double then they'll be a nationwide riot before hyperinflation starts.

Assets will hyperinflate before anything else. But even that requires money to come in at exponentially higher levels.

Very strange times.

Bananamerican's picture

ABC, right? Anything but cash.

Dump it into the stock market, bonds and/or, especially real estate.

the purpose of negative interest rates is to continue the upward march in nominal price of the large asset classes...

Thought Processor's picture



"the purpose of negative interest rates is to continue the upward march in nominal price of the large asset classes..."



Spot on. 

LooseLee's picture

Sorry to burst the two's of you's Pinko Fascist Commie Bubble, but the deflation monster is going to destroy these fiat currency asset markers you call 'prices'. Deflation will destroy all assets before any hint of 'real' inflation takes hold. You two new-wave boys need to go back to school since you missed the lesson on supply & demand....

FreedomGuy's picture

I suggest we do not know the price of anything any more. We definitely do not know the true price of stocks, bonds, and debt. We cannot even calculate risk because of government interventions. When we do not know the price of debt then we really do not know the true market price of things like homes. Homes are a hedge for Chinese and a commodity for home-flippers and a guage for govenment policy wonks...and a bad one.

In an economy, everthing is connected to everything else.

I am going out to buy more magazines and ammo. I am pretty good on food and water.

This is going to places we have never been.

If anyone has a good monetary history, has there ever been a time when rates went negative worldwide? I do not know of any interventions of this type over time and on a large scale.

FreedomGuy's picture

I  just read another ZH article and the answer to my last question is, "No, never."

Mentaliusanything's picture

The Japaneses Yen is a major traded currency unlike the tiny little Euopean estates which have dabbled in negative rates.

Lets just call this Japan's "Hiroshima" moment because its consequences will be the same for everything around it.

Mark these words... Sell it all and Now

Debt-Is-Not-Money's picture

Thank you for using the word "price" and not "value"!

jerry_theking_lawler's picture

Otherwise it all crashes in due to deflation (loans that can't generate cashflow to cover payments).....pretty simple when you stand back and look at it. Same thing happened in 2008 (2006 was the start).


I had a friend that bought a starter house in 2007 for 60k.  Said he was going to sit on it for 2 years and flip it for 70-80k. (since the value had recently increased from 50k in 3-4 years). I told him this would all only work as new people were moving into the market to buy a house and could afford it. I asked him where those people with funds to pay for an 80k house were going to come from in 2 years.....he couldn't answer. 4 years later, he short sold the house for 45k just to get out of it to move to another city. This system only works until there are no more 'suckers' left....then it collapses. Don't be a sucker.

Curiously_Crazy's picture

I wish I could buy *any* form of a roof over my head for less than $250,000 - yes a 1 bedroom tiny flat will cost you that around these parts.

Alas - I'm stuck as a renter serf (yet still one who isn't a sucker to play the greater fool).

A house for 60 grand - or even 160 grand for that matter sounds like heaven.

Tarzan's picture

They're leading this mess because their debt to GDP is 230%!

If they cant pump barrow and spend, economic activity, prices will continue to fall, the unraveling of 100s of trillions begins, and world wide deflation will be uncontrollable.

Swiss Helicopter money is just another means to evade the same problem, falling prices...

Fractional reserve Banking and Fiat are at the edge of a cliff, and they're frantically attempting to extend the cliffs edge, as deflation has them cornered, ever pushing for reality!

daveO's picture

Hyperinflation begins/continues in the home of the Kamikaze. 

FreedomGuy's picture

It's totally crazy, right?

Deflation is just as natural as inflation and different people can benefit in either situation. Markets for stocks, bonds, steel, corn and homes also naturally go up and down. Going up and down is actually stability, not instability. It is the same when a local ecosystem adapts to the range of conditions it gets. It is stable.

Instability is trying to maintain stability at all costs.

Think of it this way. Imagine if you wanted to keep your city at the same temperature all the time. Imagine how much energy would be expended in cooling then warming, then cooling a lot and overshooting and counter warming. The other option is for everyone to adapt to the range of temperatures you get from daytime to nighttime and summer to winter. Then you are more resilient. If you try to keep Billings,  Montana at Florida temperatures then everyone adapts and wears shorts and flip flops.  The minute your controls fail in January many start to die.

So, it is with government interventions. Keep a stable currency and let people properly adapt. Let the market prices of stocks, bonds and risk go where they need to be and everyone becomes more resilient because not everyone takes the same bets or risks...unless government/s make you.

swmnguy's picture

Yeah, it's like the swing feature of your electronic thermostat.  If you absolutely have to keep it 70F, your equipment will be running all the time.  If you are OK with somewhere between 72F and 68F, you'll save a ton of energy and wear and tear.

FreedomGuy's picture

Exactly, and maybe a better analogy. Then there is the problem of measuring, as well. Is the thermostat in the hall, bathroom or over the fireplace? How accurate is it?

Al Tinfoil's picture

NIRP strikes me as the Central Bankers' version of Breatharianism - the idea that one can live on air alone.  Real food and water intake are unnecessary for life as a Breatharian.


 Similarly, for the ultimate (or "consummate", please forgive the pun) Keynesian Economist, or Modern Monetary Theorist, real economic activity is not necessary to sustain a country's economy - all one needs is fiat printing.  Hence the BoJ provides Free of Charge Yen (Yen as cash, not Yen as wishful thinking, I assure you) Plus A Borrower's Bonus to the government of Japan so the government can not only meet its living expenses, but live in Imperial Splendour befitting the leader of the New East Asia Co-Prosperity Sphere.  The provided Yen need have no substance greater than air.

Buckaroo Banzai's picture

Moral NIRPitude: the devious and despicable quality of first denying that you are going NIRP, and then a week later, go NIRP, to ensure the continued ass-fucking of the global economy.

"That sneaky little shit at the BOJ tried to fool us with his NIRP denials, but his moral NIRPitude was certainly revealed today"

chunga's picture

I haven't seen this on ZH but it's probably been talked about. Supposedly a top TPP banana. (article from yesterday)

Japanese economy minister Akira Amari quits over bribery claims

Mr Amari, who has been minister of state for economic and fiscal policy since late 2012, has been widely described as one of Mr Abe's most trusted members of parliament.



As Japan's lead negotiator for the Trans Pacific Partnership (TPP) agreement, Mr Amari was expected to travel to New Zealand next week to sign the agreement.

Tarzan's picture

They have negative rates for one reason, to stave off Deflation,

which is a death sentence for fractional reserve banking and Fiat!

Japans Debt to GDP will come home to roost!

The Fed's tiny rise will be reversed for the same reason, Deflation!

They're begging People to Barrow and Spend MOAR!

chunga's picture

It's not gonna work on us because we think they're full of shit. We see heavy inflation in everything we buy except gasoline.

walküre's picture

Exactly and you need to borrow from them just to surive. Just wait. As long as the producers of real goods are excepting to getting paid in fiat, the banksters win.

Tarzan's picture

The "heavy inflation" we see is evidence of the manipulated prices propped up to maintain their balance sheet, to stave off margin calls, to hide from reality!

There IS a limit to what people will pay.  As we approach this limit and the aisles of Walmart begin to empty, the deflation demon comes calling, go to far down that road and there's a cliff!

Tarzan's picture

True, but the price of Copper, the cost to ship, etc, not so much

the industrial commodities are where they're leveraged and harder to inflate then the price of a loaf of bread...

chunga's picture

I'm calling massive price fixing on everything. 100' roll of 12/3 wire @38 dollahs. Supposedly, increased petroleum prices = increased prices on everything else.

As it turns out, decreased petroleum prices = increased prices on everything else.

It's pure, solid fraud.

OpTwoMistic's picture

Excuse me. How is this good for US stocks if any???????????

Hitlery_4_Dictator's picture

To the criminal bankers, all the world is a stage. 

new game's picture

simple math question for cb ers. is 100 x 10 better than 10 x 100 less yen valuation?

SWRichmond's picture

To the criminal bankers, all the world is a stage.

They certainly are not immune to groupthink and normalcy bias, are they?

KesselRunin12Parsecs's picture

or, thinking gefilte fish is a delicacy!

Osmium's picture

Guess what!  +396 today.  Missed it by that much!

lasvegaspersona's picture

when things get rough you HAVE to lie...or so we have been told...

JRobby's picture

Which version of "We have lost control of this thing and we are not at all sure what will happen next" do you want to hear????

This fucked shit show is terminating and there are a thousand plus "versions" of that denial in double speak on a daily basis.

I woke up's picture

It's not lying, it's negative truth