"The BoJ's NIRP Will Result In More Currency Wars And Global Growth Slowdown"

As reported previously the Bank of Japan, which not even the most optimistic central bank watchers had expected would unleash anything remotely as aggressive to prevent price discovery, stimulate asset prices and boost the exporting of deflation, became the latest central bank who, after a 5 to 4 vote, unleashed the monetary neutron bomb of Negative Interest Rates in the process pulling an anti-Draghi and shocking markets, even if admitting it can no longer boost QE due to previously discussed concerns it would run out of monetizable bonds in the very near future.

The initial market reaction was one of shocked surprise, with the Yen crashing and risk soaring, subsequently followed by disappointment that QE may be now be officially over and the BOJ will be stuck with negative rates, and then euphoria once again regaining the upper hand if only for the time being as yet another central banks does all it can to levitate asset prices at all costs, even if in the long run it means even more deflationary exports from all other banks and certainly China which will now have to retaliate against the devaluation of its "basket" of currencies.

The BOJ's excuse was simple: everyone else is doing it: as Kuroda said quickly after the NIRP announcement, the BOJ’s monetary policy is “just the same as central banks in the U.S. and Europe,” and “doesn’t target currencies.” Well, it does target currencies, but he is right: it is the same as policy in Europe and the US, where as a reminder, NIRP is coming next.

The Japanese government loved it, of course, since recent Japanese data has been ugly and getting worse, and since it allows Abe to punt all reform policies to the BOJ. Sure enough, moments ago Chief Cabinet Secretary Yoshihide Suga spoke to reporters in Tokyo. He said that the BOJ made the appropriate decision and that he welcomes BOJ’s new method aimed at achieving 2% inflation target, adding that he "can sense the BOJ’s strong determination." He said that a delay in hitting price target due to factors such as lower oil prices than expected.

A full summary of the BOJ has done comes from Goldman which frankly was even more stunned today than after the BOJ's Halloween 2014 "Yen massacre"when Kuroda boosted QE. Here is what Goldman said:

BOJ surprises with negative interest rate


The Bank of Japan (BOJ) surprised by introducing a negative interest rate of 0.1% at the Monetary Policy Meeting (MPM) on January 28-29, while maintaining its monetary base target and Japanese government bond (JGB) purchasing program. Our base scenario called for additional easing at end-April, with today’s move seen as our risk scenario. The Bank called this move “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate” and it was passed with a 5-4 majority vote.


We think the BOJ intended to cause a strong announcement effect on the forex market in particular, by implementing the measure Governor Kuroda had explicitly denied the idea of resorting to until now, when financial markets remaining volatile and macro data poor. The Bank said it is prepared to lower the interest rate further into negative territory if it decided this was necessary.


In specific terms, the BOJ will introduce a three-tier system for the outstanding balance of each financial institution’s current account at the Bank: a positive interest rate (for the basic balance(1)), a zero interest rate (for the macro add-on balance (2)), and a negative interest rate (for the policy-rate balance (3)).

  1. The basic balance refers to the balance accumulated thus far by each financial institution under QQE. The BOJ will continue to apply a positive interest rate of 0.1% to this balance, with the aim of preventing pressure on the earnings of financial institutions.
  2. The macro add-on balance is the amount outstanding of the required reserve held by financial institutions subject to the Reserve Requirement System, among others, and will be increased as the QQE program makes progress going forward, using a currently unknown calculation method.
  3. The policy-rate balance is the amount outstanding of each financial institution's current account at the Bank in excess of (1) and (2) above. This balance will increase with new transactions. The BOJ will impose a negative interest rate of 0.1% on this balance.

The Outlook for Economic Activity and Prices (Outlook Report), also released today, cut the fiscal 2016 core CPI outlook to +0.8%, from +1.4% in October, as we expected. It also pushed back the timing for achievement of the 2% price stability target by six months to “around the first half of fiscal 2017,” from “around the second half of fiscal 2016.” It only fine-tuned other forecasts.


Governor Kuroda’s press conference will be screened live from 15:30 JST today, and attention is likely to focus on the reasoning that led to the introduction of a negative interest rate at this stage after the BOJ had continued to reject it thus far. The introduction of a negative interest rate could suggest the BOJ is close to its limit for purchases of JGBs.


An important reason cited when the BOJ maintained its monetary policy in October last year was the strength of price trends, which it gauges by referring to the CPI index that excludes energy and fresh food prices (new BOJ core CPI). Thus attention is also likely to focus on the logic that led to today’s decision at this stage when that index is still robust at +1.3% in December.

BOJ framework for interest rate on current account


BOJ economic and price outlook (as of January 2016)

The BOJ’s quantitative and qualitative monetary easing program



Some other analyst reactions promptly pointed out the biggest flaw in the BOJ's action, namely the raising of doubts over policy viability:

Izuru Kato, chief economist at Totan Research in Tokyo:

  • Introduction of negative rate gives impression of policy stalemate; isn’t a dramatic turn given asset-purchase target was retained
  • There is a limit to how deep negative rate can go; further cut would prompt a reduction in retail deposit rates
  • Yields likely to fall, overall economic impact unclear

Satoshi Okagawa, global market analyst at Sumitomo Mitsui Banking Corp. in Singapore:

  • Effect of BOJ’s additional easing is uncertain given quantity is kept unchanged
  • Likely to have only limited impact over Asian currencies because dollar is more largely used in the region
  • Move may ease risk aversion, not turn sentiment completely; cites Nikkei 225 paring earlier gains

Tsutomu Soma, general manager of fixed-income department at SBI Securities in Tokyo:

  • Indicates central bank’s strong support for success of Abenomics; weaker yen normally boosts stocks, inflation
  • Length of impact depends on how strongly Governor Kuroda intends to stick to the 2% inflation target
  • USD/JPY may gradually strengthen toward 124 over next three months

Masafumi Yamamoto, chief currency strategist at Mizuho Securites in Tokyo:

  • introducing negative rates, BOJ avoids giving impression that there would be no more policy options
  • Likely to eliminate short USD/JPY positions in near term; remains to be seen whether Japan’s negative rates can offset yen appreciation pressure stemming from risk aversion

But the comment of the night came from Credit Agricole's Valentin Marinov who said, correctly, that the BOJ's easing is not supportive of risk because it will merely reinvigorates currency wars, in the process pushing the USD stronger and commodities weaker, forcing asset prices even lower. As a reminder this was DB's argument against more QE by the ECB as well.

More importantly, since "almost 60% of the households' financial assets are held in deposits. If indeed, the Japanese banks pass on some of the costs from the BoJ’s penalty rate to their depositors, this will result in a negative wealth effect, reducing the purchasing power of the Japanese consumers. Domestic demand should suffer and Japan's contribution to global growth could decrease further. The BoJ's measures thus should result in more currency wars and continuing slowdown in global trade and growth."

Here is his full remark:

BoJ easing to reinvigorate currency wars, not supportive for risk


In a surprise move, the BoJ cut to -0.1% the rate applied to a portion of the Japanese banks' current accounts. In theory, the policy should boost the effectiveness of its QE program by encouraging the banks to spend rather than save the cash they receive in exchange for their JGB holdings. In reality, the measure is aimed at cheapening JPY. Indeed, as in the case of EUR, the negative rates could encourage portfolio and FX reserve diversification out of JPY and boost its attractiveness as a funding currency. 


The BoJ actions should lead to further intensification of global currency wars with central banks around the world trying to engineer sustained competitive devaluation against the background of slowing global trade and growth as well as persistent commodity price disinflation. With its latest measures the BoJ will allow Japan to borrow more growth from its trading partners and limit the severity of the imported disinflation.


At the same time, the negative deposit rates could weigh on domestic demand and hurt the economy's growth prospects. This is because almost 60% of the households' financial assets are held in deposits. If indeed, the Japanese banks pass on some of the costs from the BoJ’s penalty rate to their depositors, this will result in a negative wealth effect, reducing the purchasing power of the Japanese consumers. Domestic demand should suffer and Japan's contribution to global growth could decrease further. The BoJ's measures thus should result in more currency wars and continuing slowdown in global trade and growth.


JPY depreciated sharply in the wake of the BoJ decision and the downside pressure could persist for now. That said, given that the rate cut could fuel more global currency wars and global growth uncertainty, it need not necessarily support investors’ risk appetite. The risk aversion we had since the start of the year could therefore persist and limit the JPY-losses to a degree. We think that other Asian currencies should remain vulnerable and we like to fade the latest bounce in both NZD and AUD especially given the slew of Chinese data next week.


We also think that currencies that are vulnerable to more central bank easing and/ or FX intervention like EUR and CHF should remain attractive selling opportunities. Against the background of raging currency wars, we remain constructive on USD and believe that GBP could be in for a short squeeze ahead of the BoE IR next week.      

And now we await for the PBOC, whose hand has just been forced by the BOJ, to respond and devalue further in the process unleashing even greater, record capital outflows and even more market volatility.

However, the best news in all of the above is that the BOJ's action takes the world one step closer to the full collapse of the central bank regime as with every incremental expansion of "emergency" policies, with every new "policy error", the monetary emperors demonstrate how naked and ultimately powerless they have been all along.