Oh what a difference a week makes at the Bank of Japan!

This morning has seen some epoch shaking news and it came via a route that readers of this website would have expected. Back on the 21st of January the Governor Kuroda of the Bank of Japan told the Japanese Parliament this. From Reuters.

Bank of Japan Governor Haruhiko Kuroda said he is not thinking of adopting a negative interest rate policy now, signalling that any further monetary easing will likely take the form of an expansion of its current massive asset-buying programme.


“There are pros and cons of adopting negative interest rates … The Federal Reserve didn’t adopt negative interest rates and yet, its policy succeeded in stimulating the U.S. economy,” he told parliament on Thursday.

Okay and why did he say that? Well if we go back to the 12th of January he gave a speech in effect telling us that things in the Japanese economy were on track.

More than two and a half years have passed since the introduction of QQE. QQE has exerted its intended effects. The underlying trend in inflation has been improving steadily. For example, the CPI inflation rate excluding fresh food and energy has been positive for 26 consecutive months, which is the first time this has happened since the late 1990s. The latest figure is 1.2 percent for November. These improvements have been supported by very favorable employment conditions. The unemployment rate has declined to around 3 percent, the level that can be considered as full employment in Japan.

So according to the official story the inflation situation was good (for those like him who believe that more inflation is better) and unemployment was excellent or at full employment or Happy Days! Regular readers will be aware of my view on such matters but let me repeat the quote given by Jim Hacker and Otto Von Bismarck for newer readers.

Never believe anything until it is officially denied

This morning

From the Bank of Japan statement and the emphasis is mine.

The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank.1 It will cut the interest rate further into negative territory if judged as necessary.

So Governor Kuroda has outed himself as a fan of Fleetwood Mac.

Tell me lies
Tell me sweet little lies
(Tell me lies, tell me, tell me lies)
Oh, no, no you can’t disguise
(You can’t disguise, no you can’t disguise)
Tell me lies

If we move to the economics here there are two immediate problems. The most obvious is that after all the interest-rate cuts, QE and then QQE as well as purchases of equity and real estate does anybody really believe that an interest-rate move of 0.1% will make any difference to the real economy?  Secondly where does this leave the official mantra that QQE or Quantitative and Qualitative Easing is going really well?

Also there is the technical issue of the vote which was 5-4. That would be significance in a western country but for Japan with its “face” culture this is a really big deal and one of the dissenters stated this.

Mr. T. Kiuchi considered that introduction of a negative interest rate, which would adversely affect smooth conduct of the Bank’s JGB purchases, would only be an appropriate policy measure in a crisis situation.

Could the Bank of Japan go even lower?

We were told this in the statement in what has become a standard mantra for central banks in such a position. Actually there are examples where it may do so right now.

As before, the Bank will not set a lower bound for yields on its JGB purchases. Thus, the Bank can carry out outright purchases of JGBs with negative yields lower than minus 0.1 percent.

This has been a crossing of a Rubicon for the Bank of Japan as it has long resisted playing in the negative arena. Also in a typically Japanese move the new -0.1% interest-rate applies to some deposits at the Bank of Japan and not others as we wonder how much impact it will have. Complicated? Well welcome to Japanese policy!

In case you are wondering why this is complicated well it is as ever to help the banks.

A multiple-tier system is intended to prevent an excessive decrease in financial institutions’ earnings stemming from the implementation of negative interest rates that could weaken their functions as financial intermediaries.

What is the official explanation?

As I have explained on here and on Share Radio yesterday the crib sheet passed from central banker to central banker is to blame Johnny Foreigner or gaijin.

Recently, however, global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy.

Where there is an extra nuance here is that blaming foreigners is an area where last century things went very wrong in Japan.

Exchange Rates

They were caught on the hop by this as I guess they had been reading all the mainstream analysis that Abenomics and hence the Japanese economy were going swimmingly. If we start with currency markets then the Japanese yen dropped like a stone. The high over the past 24 hours was 118.5 and it is now 121 having dropped to 121.4 along the way.If we switch to the UK then the Pound £ has gained 3 Yen from 170.3 to 173.3. Along the way those who had gone into the Yen on the “flight to safety” argument of the year so far got their fingers severely singed.

If we step back this is plainly an echo of the competitive devaluations which so marred the 1920s and 30s. There are two perspectives here  as of course Mario Draghi of the ECB is trying the sam tactic but I suspect the Japanese are more concerned about what China is up to with the Yuan.

Other financial markets

Let me start with the Japanese Government Bond or JGB market which surged on the news. The ten -year yield is now as low as 0.1% and all yields out to the eight-year maturity are now negative. If lower bond yields were a solution of course Japan would have left the “lost decades” long before now but we can also note an international perspective. From Reuters Jamie.

Negative bond yields – Sweden out to 5 years maturity Germany out to 7 years Japan out to 8 years Switzerland out to 15 years.

I did warn that it was spreading and the beat goes on. It has also affected the United States where you may recall there are supposed to be “between 3 and 5 interest-rate” rises this year but the ten-year yield has dropped to 1.94%. There is also an influence on the UK where the ten-year Gilt yields 1.6%.

You will not be surprised to learn that the equity market rallied on the news and that the Nikkei 225 rose nearly 3% to 17,510. Other equity markets are rallying in response too.


There is much to consider here and I recommend that readers take a look at the category for Japan’s Economic Situation on here as it tells the tale which leads to here. One clear thought though is that Japan has been the biggest beneficiary from the falls in the oil price due to its dependency on energy imports and yet it needed to do this. I note that those objecting to me pointing out on Twitter than Abenomics is failing seem to be otherwise engaged today.

The theme of negative interest-rates and yields spreading receives another move forwards on the chessboard too. If you are wondering about what will happen to cash then you might enjoy the numbers below.

Meanwhile those in the UK who remortgaged on the back of the “sooner than markets expect” and “around the turn of the year” hints and teases of Bank of England Governor Mark Carney might be forming up a pack soon. I wrote about record lows for mortgage rates fixed for five years only yesterday and should the UK Gilt 5 year yield remain at the 0.94% it has fallen to this morning then they are likely to go lower still.

Also was this the real reason why the Economy Minister Amari resigned yesterday?





12 thoughts on “Oh what a difference a week makes at the Bank of Japan!

  1. “The Federal Reserve didn’t adopt negative interest rates and yet, its policy succeeded in stimulating the U.S. economy,”

    Yeah, that policy of having enough oil for their own consumption. Why doesn’t Japan adopt that policy too, duh!?

    • Hi TW

      This comes to the heart of one of the points I made. Japan is a big oil and commodities importer, so if Abenomics is not working when it has received a big favourable push when will it? At the end of the day unless “something wonderful” happens they have a shrinking population and a rising public debt.

  2. Hi Shaun

    Although this has the feel of a “toe in the water” I cannot see this as other than a last throw of the dice, a desperate move because all else has failed.

    If NIRP really did get going and we were in the -2% + range where it had to be reflected at thye retail level I cannot see people putting up with this. It will not only have negative wealth effects as far as savers are concerned, effectively confiscation of wealth, a further trashing of pensions but, and in my view quite lethally, it moves fecklessness from a lifestyle choice to a moral imperative. This is not a policy it is a religion which requires not only faith but obeisance and I suspect both will be in short supply fairly soon.

    • Hi Bob J

      The smell of desperation is added to by the fact that the Bank of Japan has resisted dipping its toe into negative interest-rates. For example it was not so long ago that it refused to buy JGBs at negative yields as opposed to the new policy. Putting it another way a 5-4 vote in Japan is a big deal especially with the Economy Minister going the day before. Trouble at mill…

    • Hi Andrew

      That’s a very good point! Tokyo like so many capital cities is seeing house price inflation that is far higher than the official consumer inflation measures and far higher than wage growth. I don’t think we can call it a bubble if we look back to where they have been but it is certainly a boom.I wonder if it is influenced by the plans for the 2020 Olympics?

  3. Hello Shaun,

    I cannot believe the BoJ really thinks MIRP ( Below Interest Rate Policy – BIRP ? ) will have any effect at all – not if they looked at the EU

    so why then ?

    I have posted before – if these BIRPs hit the high street then we will see a massive banking collapse – considering TPTB have done everything to stop such a thing so far – why would they ?

    More palatable than a bail-in ?

    be a terrible rush for cash for sure – better stuff some in the mattress !

    And to get Banks lending in a climate that Big Corp doesnt see any reason too?

    who are they kidding ?


    • Hi Forbin

      It is quite a mess! When central banks introduce negative interest-rates they include some exclusions for the banks but banks still get affected. After a while the banks make mortgage borrowers pay by trying to nudge mortgage rates higher whilst keeping savings rates near zero. That is not a stimulus…..

      Meanwhile UK mortgage borrowers wonder about the Forward Guidance of Mark Carney.

  4. Shaun, this is about the yen and the yuan. Japan’s trade with China is seriously affected by China’s slowdown. Only Korea is worse, I think. And because of Japan’s entrenched internal deflation – which seems to be principally due to chronically low business confidence – it desperately needs a positive trade balance. CNH is falling due to China slowdown and capital flight, and in response China is having to ratchet down the CNY. All the SE Asia central banks have cut rates in response to China’s slowdown and the yuan fall, but Japan’s interest rates were already so low that the inevitable rate cut to support the current account balance took them negative.

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