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Going negative

29/01/2016 … Author:

The Bank of Japan took markets by surprise this morning by moving to a negative interest rate policy on some of the funds which financial institutions deposit at the central bank. In order to not damage financial companies’ earnings too much however they have introduced a tiered system so not all funds will suffer.

Existing balances will continue to earn interest of 0.1%. Those balances which are required to be held at the central bank as part of solvency requirements and those funds related to the central bank’s lending programs shall earn 0%. Surplus funds over and above these however will attract an interest rate of -0.1% in what appears to be encouragement by the central bank for financial institutions to put these to work, perhaps by increasing their lending.

The policy change has also had the favourable knock-on effect of weakening the Japanese yen. Since mid-last year equity markets have been weaker and volatility has increased. This has seen the yen appreciate as it is considered a “risk-off” currency. From the 29 July 2015 today, prior to the announcement, the currency had strengthened by 4.3% against the US dollar. This was a hindrance to the government and central banks goal of increasing inflation. It also had the potential to be a drag on exporting companies’ profits, which were benefitting from a weaker currency when translating those earnings back to yen. This morning following the news the yen depreciated from 118.61 to the US dollar to 120.73.

The Bank of Japan joins the realm of other central banks which now have negative interest rate policies, including Switzerland, Sweden and Denmark.

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