Bank Of Japan Surprises Analysts

In a move which appears to have caught most financial analysts by surprise, the Bank of Japan has moved its interest rate into negative territory, to the tune of minus 0.1%. This means that banks depositing funds with the Bank of Japan will have to pay for the privilege rather than earning any interest for it. The decision is being viewed as an attempt to boost investment in equities (where share dividends or bond yields actually provide a net return) and drive inflation higher.

As a consequence of the move, the Yen has depreciated against other major currencies, partially reversing the gains it made this month as panic hit stock markets following sharp falls in China. A steep decline in stocks propels some investors to park cash in a safe haven currency – such as the Yen. The Dollar now buys 120.6 Yen, roughly, and at the start of the year, it bought 120.6! It hit a low of 116.1 as recently as the 20th January. The Yen had been easing towards the end of January anyway as investors recovered their nerves somewhat and (probably) returned to the markets in search of bargains.

The move will make Japanese exports more competitive, but unless the trend accelerates further, only to the position (against the Dollar) that they enjoyed at the end of last year. It makes imports marginally more expensive too, boosting inflation, but the same caveat applies. The move may be intended to have a psychological effect on Japanese investors by making them more Bullish and willing to invest in stocks to gain a return. Commercial banks base their interest rates on the BOJ rate, but they would be under no obligation to charge their customers for holding savings, but meagre returns on savings are likely to be further cropped.

The driver for a similar move by the ECB (on the overnight deposit rate) was to “stimulate” lending to businesses which banks had been reluctant to do in the wake of the Global Financial Crisis and a more conservative approach forced upon them by regulators. The problem in Japan is that there appears to be little appetite in the business sector to borrow money to expand in the face of weak demand, so it remains to be seen how effective the BOJ initiative will be.