The BoJ surprised the markets by cutting the rate on excess reserves to -0.10bps, and signalling it is ready to cut it again and to further expand the asset purchase programme, if needed…..
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The BoJ meeting brought a surprise cut of the rate on excess reserves, from +10bps to -10bps, and indicated that further cuts will be implemented “if judged as necessary”. The QQE programme remains unchanged, with the annual increase in the monetary base at +80 trillion yen. The BoJ says that the new monetary policy strategy (“QQE with a negative interest rate”) is aimed at further lowering the short end of the yield curve, and at exerting downward pressure on all other maturities, with a combination of negative rates and asset purchases , to reach the inflation goal “quickly”. According to Governor Kuroda, monetary stimulus may be stepped up by using several levers, as appropriate. The introduction of negative rates does not imply a limit for quantitative stimulus, which may be further expanded if needed. The central bank specified that rates may be cut again, in light of the experiences of other countries which have put in place similar measures (Switzerland, with rates at -75bps, Sweden, at -110bps, and Denmark, at -65bps).
The decision to cut rates into negative territory was controversial, as four meeting participants out of nine voted against the measure. It should be pointed out that the term of two of the dissenters will end soon (Shirai in March, Ishida in April) and the new members will probably be appointed by the Prime Minister also based on their openness to supporting Governor Kuroda’s accommodative stance.
The statement declares that the current policy stance will be kept in place until the 2% inflation goal is reached. The BoJ justified the new accommodative move mentioning recent volatility on the global markets, combined with the drop in oil prices and weakness in commodity exporters, which threaten the recovery in Japanese economic growth, and the “conversion of the deflationary mindset”. During the post-meeting press conference, Governor Kuroda said that the price trend remains positive, although the drop in oil prices will exert downward pressures on the CPI until the end of fiscal year 2016. Moreover, in his view, there are “large” downside risks to the economy and to prices.
In an update of the price and activity outlook, the BoJ has pushed back (to the first half of fiscal year 2017) the date on which the inflation goal will be reached, given the new recent drop in energy prices, whereas the growth scenario has changed little. The inflation scenario is the main reason for the introduction of negative rates.
The rate cut is modulated at multiple tiers: the balance of reserves of each institution is split into three tiers, to which rates will be applied of -10 bps, zero, and +10 bps respectively. The “basic balance” (defined as the average balance in 2015) will continue to be remunerated at +10bps. A zero rate will be applied to the “macro add-on balance”, defined as the required reserve amount; the amount held for specific programmes (Loan Support Program, Funds- Supplying Operation); plus an amount calculated with specific ratios of the former two amounts. The -10bps rate will be applied to balances in excess of the “basic” and “macro add-on” balances.
The central bank believes that the 3 tiers system can contain the negative fallout on bank earnings, and that the downwards shift of the yields curve will help achieve the inflation goal. The markets reacted strongly, with the Nikkei index on the rebound and a correction of the exchange rate, although the governor explicitly warned that today’s decisions are not geared to achieving a depreciation of the exchange rate. The effect of the measures on growth will be modest, in our view.
The new monetary stimulus measures come at a time of mounting signals of weak growth at the end of 2015: December data have pushed real households’ spending and industrial output into negative territory in 4Q. On 15 February, the advance estimate of 4Q GDP will be released: based on the latest data, the forecast is now for a -0.3% q/q drop, due to a contraction of all components of domestic demand.
Source: BONDWorld.ch
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