BoJ surprises with negative interest rates

Jan 29 2016, 6:02 am

Bank of Japan surprised the markets today by introducing negative interest rate policy. The Central Bank is expected to change interest for excess reserves for financial institutions which park their funds at the BoJ. A rate of -0.10% will be charged, according to the Bank of Japan’s monetary policy statement. The Central Bank came out dovish today, noting that it will cut rates further if necessary. On inflation, which BoJ’s Kuroda remained optimistic that the Central Bank’s 2.0% target inflation would be reached by the fiscal year of 2016 took a more dovish stance today.  BoJ Governor Kuroda said that inflation is now likely to move to the 2.0% target rate by 2017.

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Besides the BoJ’s monetary policy statement, other data released today including the Japan’s Consumer inflation numbers, which rose 1.30%, up from 1.20% previously.

The Bank of Japan’s decision to introduce a negative interest rate was a surprise, with the market largely expecting the central bank to expand its asset purchase program”, says Khoon Goh, an FX Strategist at ANZ Bank.

Today’s policy decision also brought forth market speculation that the BoJ was also looking at the exchange rate of the Yen. The Yen has been trading within the ¥125 – ¥116 price band for most of the last year and the BoJ had in the past managed to verbally talk down the currency when it posed a threat to break above ¥125 while at the same time ¥116 was seen as the floor. Japan’s economic policy is known for being influenced by the Yen’s exchange rate as the country requires a weaker currency in order to make its export drive economy more competitive.

The markets were largely caught off-guard as most economists expected the BoJ to hold off from making any big decisions at today’s meeting, which was one of the reasons why the Yen weakened strongly as the event was not priced in.

Market Reaction to BoJ’s Announcement

USDJPY - Intraday Chart (29/01/2016)
USDJPY – Intraday Chart (29/01/2016)

The Yen initially weakened ahead of the BoJ’s statement but quickly rallied on the headline release. USDJPY posted a one-month high at 121.49Yen before trimming its gains after the markets digested the news, clearly not quite impressed with the policy decisions. However, the USDJPY is currently up 1.38% for the day. Against the Euro, the Yen eased to 132.45. The equity markets also responded positively. The Nikkei225 is currently up 2.29% for the day, trading at 17475.

Yesterday, US equity markets closed in the Green. The Dow Jones Index gained 0.79% while the S&P500 Index closed with gains of 0.55% for the day. The gains mostly came from bullish Oil prices and Facebook shares which surged 15.5% for the day. The markets are currently in a risk-on mode with the Australian dollar surging ahead while Gold prices remain subdued.

Looking Ahead – 29/01/2016

The markets today will be looking to the US preliminary GDP data which is expected to show that the US economy grew at a modest pace of 0.80% in the fourth quarter of 2015, down from 2.0% seen during the previous quarter. Besides the GDP data, Eurozone flash inflation estimates are due with the headline CPI expected to rise 0.40%, up from 0.20%. Later in the evening, Canada’s GDP data is also due to expectations of a 0.30% monthly increase in the economy.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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