The Bank of Japan (BOJ) has just stunned financial markets, taking official interest rates into negative territory. Voting 5-4 in favor of the measure, the bank stated that it will charge an interest rate of -0.1% for excess…
The Bank of Japan (BOJ) has just stunned financial markets, taking official interest rates into negative territory.
Voting 5-4 in favor of the measure, the bank stated that it will charge an interest rate of -0.1% for excess reserves parked at the bank by financial institutions.
It also noted that it will be willing to cut interest rates further if deemed necessary.
Akin to the same policy implemented by the Swiss National Bank, The BOJ announced that it will adopt a tiered system for interest rates, announcing that outstanding balances of each financial institution’s at the Bank will be divided into three tiers, to each of which a positive interest rate, a zero interest rate, or a negative interest rate will be applied, respectively.
The chart below explains the mechanism to be implemented by the BOJ.
Bank of Japan
The banks QQE program was left unchanged, maintaining the annual expansion in the nation’s monetary base at around 80 trillion yen.
Helping to explain the shock decision, the BOJ’s median core CPI forecasts were lowered for the 2016/17 fiscal year.
Excluding volatile items, the bank now expects inflation to average 0.8% next year, down from 1.4% seen in its October forecasts. Forecasts for 2015/16 and 2017/18 were left unchanged at 0.1% and 1.8% respectively.
The BOJ now expects to meet its 2% inflation target around the first half of fiscal year 2017/18, adding that it it expects it to remain around this level in the period thereafter.
Perhaps in response to the expected positive impact that ultra-easy monetary policy will deliver, the BOJ increased its 2016/17 median GDP forecast up from 1.4% to 1.5%. That for 2017/18 was left unchanged at 0.3%
The surprise move, unexpected the vast majority of analysts, initially saw the Nikkei rally more than 3%. However, in response to the negative impact on bank earnings that negative interest rates will likely deliver, it currently sits down 1.3%.
The USD/JPY had a similar reaction to the Nikkei, rallying as high as 121.33 immediately after the BOJ announcement. Like stocks, it too has retraced significantly, currently sitting at 119.38, up 0.48% for the session.
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