Yen drops 2% as BoJ surprises with negative rates: research notes

Volatility hit Asian equity and currency markets on Friday following a surprise overnight move by the Bank of Japan to adopt negative interest rates. Here are some notes on the move by a number of leading currency analysts:


saxobanklogobigSaxo Bank /, John J. Hardy – Bank of Japan Governor Kuroda was known for liking to surprise the market, and he did so again overnight with an entirely unanticipated move into negative territory – cutting the rate for deposits with the central bank to -0.10% (though in a complicated, three-tier system ).

The reaction unfolded in zany fashion, but by the end of the session, it was clear that this was negative for JPY at least in the short term. What is not clear is how the BoJ expects this to help the Japanese economy. Negative rates are hard on banks, and bank credit is the lifeblood of modern economies, together with fiscal outlays.

Furthermore this move could prove disruptive for the BoJ’s own quantitative and qualitative easing policy, as it makes it more attractive for banks to hold Japanese government bonds rather than selling them to the BoJ only to suffer negative yields. Of course, the move was mostly aimed at weakening the JPY by discouraging speculation of JPY strengthening, making it less attractive to hold JPY and possibly increasing interest in capital flowing out of the country to invest in higher yielding currencies/foreign bonds.

Today’s focus will be on where we find equilibrium after the initial shock in the JPY crosses and whether this is enough to provide a further tailwind to the attempted comeback in global risk appetite. Along those lines, look for today’s US Q4 GDP report as a setup to next week’s crucial US data (PCE inflation Monday, ISM’s Monday and Wednesday, and Friday’s jobs report).

Somehow this BoJ move looks like desperation and ineffective, last-ditch defense, and I’m not so sure that we get a sustained move on the back of it, certainly not for global risk appetite. The tricky part will be to define “sustained” – a few days to a couple of weeks is my expected time frame.


swissquoteSwissquote, Arnaud Masset – A few hours after the Japanese Ministry of Internal Affairs released depressing inflation figures, Governor Kuroda took the market by surprise as he announced that the BoJ will adopt negative interest rates, arguing it will stimulate investment and consumption. The market’s reaction did not take to come. The Nikkei jumped instantaneously by more than 4% to 17,638 points before collapsing to 16,767 points, to return finally above the 17,500 level. The sharp moves betray the market’s mixed feeling regarding the BoJ decision. Indeed, rumour are spreading that the central bank cut rates because either they realized that the marginal effect of an increase of the QE are very small – and they don’t want to expand further its balance sheet – or they couldn’t find any assets to buy. However, one thing is sure, inflation is still well below the BoJ’s target and showed no sign of picking up. On the FX side it was also rollercoaster session for JPY crosses. USD/JPY jumped from 118.50 to 121.41, then fell to 119.13 before bouncing back again to 120.70. In the end, the Japanese yen fell 1.50% against the greenback, 1.70% against the pound sterling, 1.10% against the euro and 1.15% against the Swiss franc. USD/JPY is currently testing the resistance implied by its 50dma (at 120.33). We expect the JPY to weaken further in the coming days as the negative interest rates will drive investors – the ones who were taking shelter amid the recent risk-off environment – out of yen positions.


hantecmarketsHantec Markets, Richard Perry – The world’s central banks are trying to get a grasp on the market turmoil that 2016 has brought. The ECB has already noted that it will be considering further easing measures at its next meeting, whilst the Federal Reserve is “closely monitoring” economic developments. However in an unexpected move it has been the Bank of Japan that has made a firm step towards easing monetary policy. In an extremely tight decision, the BoJ voted 5-4 to engage a negative interest rate of -0.1% for banks that hold funds at the central bank, and also left the door open for further easing. This surprise easing from the BoJ has significantly weakened the yen amidst some incredible volatility. This created wild swings on Japanese equities, with the Nikkei closing around 2.8% higher. European markets are moving more on the mildly positive close on Wall Street which saw the S&P 500 up 0.6%, whilst the overnight gains on oil are also supportive for risk appetite.

In forex markets the big movers are clearly any of the Japanese yen crosses, however the general  further improvement in risk as oil recovers by another 2%, which is helping to drive the commodity currencies higher, but also sterling too. The US Treasury yields are sharply lower as the actions of the BoJ further call into question whether the Fed will be able to hike in March. Gold is consolidating today.

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