“Lower For Longer” has turned into “Negative Now,” following the Bank of Japan’s surprise overnight decision to step up its years of monetary stimulus by adopting negative interest rates for some depositors.
The BoJ announcement spurred stocks and bonds around the world to rally and sent the yen tumbling.
Of course, Wall Street is doing its best to weigh in as quickly as possible, and here’s what analysts and economists are saying so far.
Shinichiro Kadota, Mitul Kotecha, and David Fernandez, strategists at Barclays:
“Upward pressure on USDJPY is likely to continue in the near term in the wake of BoJ negative rates and the ongoing recovery in global risk assets. … The enhanced ‘open-endedness’ of BoJ policy with indication of potentially deeper negative rates should reduce concerns on the limits of the QQE [quantitative and qualitative monetary easing] program, helping to alleviate appreciation pressures on the JPY over the coming weeks. This is timely and reflects the BoJ’s renewed focus on the JPY as the quantitative durability of QQE was coming under question. In this respect negative interest rates will be a sharper tool. Depressed domestic yields should encourage further portfolio rebalancing outflows, putting pressures on the spot JPY and JPY basis. … However, the implementation of a three-tier system and fact that the policy rate balance subject to negative rates would only turn meaningfully positive from mid-2016 means that the impact on the JPY may not be too significant for long until/unless there is a more aggressive broadening/deepening of negative rates. Moreover, potential further easing by the ECB (and potentially other central banks) into deeper negative rates may make the BoJ’s tiered negative rates a bit more blunt.”
Kit Juckes, macro strategist at Société Générale:
“First of all, forget the details, feed on the symbolism. Germany, Switzerland and Japan, the three great current account powers of the post Bretton Woods era, whose surpluses have financed the frivolity of baby-boomer Anglo-Saxons, are being told in no uncertain terms to stop saving. Whether it works or not matters less than the fact the disinflationary forces in the global economy are so entrenched that these central banks feel the need to set off on this path at all, following a trail of crumbs as they head for the gingerbread house. … Will negative rates dissuade an ageing population with inadequate pension and healthcare cover from saving? … No. Will negative rates encourage investors to shift out of bank accounts and into higher-earning assets? Perhaps, but this is asking them to do what they already do. The yen already weakens in risk-on markets and only rallies when a scary world encourages capital repatriation. Does the housewife who recently got stopped out of a short yen, long Brazilian real trade really need negative rates to lend more money to Rousseff and co? Of course not! She needs something to give her confidence in Brazil, not another reason not to keep her cash at home.”
Jim Reid, strategist at Deutsche Bank:
“Headlines are suggesting it was a close call after being passed by a majority vote of five to four. It’s caught the market by surprise however with only six of 42 economists forecasting for any sort of easing (all six economists forecasting for more QE and just one expecting a rate cut). At the same time, the BoJ has delayed its target date of reaching its 2 percent inflation goal by six months, aiming for the first half of fiscal 2017 now (March to October 2017) while also downgrading current year forecasts. Markets have been super volatile in the aftermath and by the time you read this may have moved even more.”
Kiichi Murashima, strategist at Citigroup:
“We think today’s decision implies the following. First, the BoJ may now think the existing QQE framework alone is insufficient to achieve the 2 percent inflation target. Second, the BoJ may be starting to prepare for the possibility of facing the technical limits of QQE (i.e., JGB buying) in the not-so-distant future. Third, the BoJ may have judged that the cost of a significant expansion for QQE, even if it is technically possible, would be larger than the benefit, as such a move would probably bring side effects by way of a sharp drop in the yen versus the dollar.”
Robin Brooks and Michael Cahill, Goldman Sachs:
“Overnight, the BoJ surprised markets by introducing a negative interest rate of -0.1 percent, implemented by a move to a three-tiered interest rate system for reserve accounts at the BoJ. In our view this reaffirms the BoJ’s commitment to achieving its inflation target, and should help contribute to a more positive backdrop for risk. $/JPY is over 1.5 percent higher following the announcement, at 120.75. We continue to recommend $/JPY higher as part of our FX Top Trade recommendation for 2016, and forecast 130 in 12 months.”
Peter Boockvar, chief market analyst at the Lindsey Group:
“It’s a tax on money that banks will just pass on to their customers. Wanting higher inflation without faster wage growth is a tax on consumers. And, the BOJ just amped up the global currency battles. I call this economic kamikaze and I’ll say for the millionth time, I just don’t get the bear case on gold in light of this with fiat currency having such a large bulls-eye target on it. Believing that generating higher inflation is a needed precursor to faster economic growth is nonsense. Inflation reads are a symptom of the activity of the underlying economy. I’ll also repeat the irony that markets love it when the BoJ and ECB further debase their currencies but freak out when the Chinese also want a weaker yuan.”
Izumi Devalier, Paul Mackel, and Alastair Pinder, economists and strategists at HSBC:
“The latest action gives cover to the BoJ that it is doing everything it can to combat disinflationary pressures. However, with interest rates already at record lows, we do not expect these measures to have a significant impact on the real economy, or inflation. As such, we believe that questions will soon be asked about how long JPY weakness can persist. As such, we think there are still strong downside risks to the board’s inflation forecasts. Pressure for additional easing is unlikely to go away.”
Marc Ostwald, strategist at ADM Investor Services International:
“It was German Chancellor Konrad Adenauer, who famously said ‘Was interessiert mich mein Geschwätz von gestern.’ – Why am I interested in the gibberish I spouted yesterday, so here is some from BoJ governor Kuroda from just 12 days ago: January 16 2016: BOJ’s Kuroda says no plan to adopt negative rates now.”
Ipek Ozkardeskaya, analyst at London Capital Group:
“The BoJ took the lead from the ECB this week with a surprise decision to cut the interest rates to the negative territory. Concerns regarding Japan’s drying-up sovereign market may have pushed the BoJ to act on rates, while keeping the annual asset purchases unchanged at 80 trillion yen. And as it appears, the BoJ will likely intervene via rates in the future. It has said it will cut more if needed.”
Antoine Bouvet, rates strategist at Mizuho International:
“The BOJ announced it will cut interest rates to -0.1 percent as part of a tiered system that will see banks balances in excess of existing ones and in excess of required reserves charged the new negative rate. The central bank also cut its inflation forecast and pushed out the date it expects it to rise to 2 percent by six months to the first half of fiscal year 2017 (i.e. Q2 to Q3 2017). The pace of assets purchases was left unchanged. The surprise cut in rates pushed JGB [Japanese government bond] yields to record lows, the curve flatter and should have a knock-on effect on EGBs [European government bonds] at the open.”