Japan’s surprise move to introduce negative interest rates will have little direct economic impact, but is great news for its battle against deflation and was cheered by investors, says Chief Economist Léon Cornelissen.
The Bank of Japan on Friday narrowly voted to follow the European Central Bank’s example and set a rate of -0.1% for deposits left by financial institutions, though it has adopted a more complex three-tier system. It effectively means that banks are charged for leaving excess funds with the central bank, encouraging them to lend it out instead.
The Japanese stock market rallied on the news, while Japanese government bond yields declined by 10 basis points and the yen dropped sharply against other currencies. Japan has been encouraging the yen to fall as a devalued currency helps its exporters, while making imports more expensive, thereby importing much-needed inflation.
The move will have repercussions for other central banks in setting their own interest rate policies, says Cornelissen. “It’s basically a blunt move to push down the yen and push up the Nikkei,” he says. “The material economic impact of these measures is limited, but the markets rallied anyway. The ‘safe haven’ yen rally was reversed, so the dollar/yen exchange rate is at the same level that it was at the end of last year.”
“The move will make it easier for the ECB to cut the deposit rate at its next meeting, and make it more difficult for the US Federal Reserve to raise rates. The Fed said on Wednesday that it had hit the ‘pause’ button but had the clear intention to raise rates further. But this Bank of Japan decision makes it more difficult.”
“So the psychological impact is high. Markets were taken by surprise because eight days ago, the Bank of Japan Governor Haruhiko Kuroda said in the Japanese parliament that he was not thinking of introducing negative interest rates, and then eight days later, he did so.”
“However the 5-4 vote for it was a close call, and so introducing negative rates was pretty aggressive. It’s clear that we haven’t reached the limits of monetary policy yet, and Japan is now joining the club of negative interest rates of the Eurozone, Denmark, Sweden and Switzerland.”
Cornelissen says the underlying economic picture in Japan remains weak, and the threat that the country fears most – deflation – is rearing its head again. The central bank’s prediction for when it will hit its 2% inflation target was moved further out to the third quarter of 2017, indicating that the country is struggling to create price rises.
“We have had a lot of pretty negative economic figures from Japan, so the macro news hasn’t been good,” he says. The Japanese economy seemed to be doing all right, because we had an upwards revision of third-quarter GDP, but if you look at the more recent data, we have seen industrial production in December falling by 1.6% and overall household spending falling by 4.4%.”
‘We have had a lot of pretty negative economic figures from Japan’
“Of course these are volatile indices, but you could argue that the first estimate of GDP figures suggested a technical recession, and then we see a huge positive reversal of these figures. So can we trust these figures? We have to be a bit skeptical because these large revisions make you reluctant to trust them, and the more recent economic news is clearly negative.”
“Japan is again on the brink of deflation because of the oil price impact, and the Bank of Japan has again adjusted its inflation forecast, saying it will reach its 2% target in the second half of 2017. We can still be skeptical about this new prognosis.”
Cornelissen says the Chinese economic slowdown is another worry for Japanese policymakers, and economic data will be unreliable over the Chinese New Year holiday period, making forecasting more difficult.
“What was interesting was that in their statement they bluntly mentioned China as being one of their risks,” he says. “It’s very uncommon for central banks to do name-dropping in this way, but they singled out China, and of course that’s realistic because we’re all seeing a cyclical weakening of the Chinese economy. And with the market turmoil it is clear that the Bank of Japan wanted to send a positive signal.”
“We are now entering Chinese New Year, so we will lose sight of developments in the Chinese economy because all data will be distorted for a while due to the celebrations – it is always a nightmare for statisticians.”
In the worldwide equity portfolio, Robeco Investment Solutions is overweight Japan. “Obviously we will continue to stick to this strategy. Our position has been strengthened by the Bank of Japan’s actions,” Cornelissen says.
The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.