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.
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商号等： ロベコ・ジャパン株式会社 金融商品取引業者 関東財務局長（金商）第２７８０号
加入協会： 一般社団法人 日本投資顧問業協会