Emma Wall: Hello and welcome to the Morningstar Series 'Market Reaction'. I'm Emma Wall and I'm joined today by Mike Bell, Global Market Strategist for JPMorgan.
Hi, Mike.
Mike Bell: Hi.
Wall: So Japan announced some shock monetary policy last week. What happened?
Bell: So they cut deposit rate since negative territory at minus 0.1%, but fundamentally as well not applying that to all of the reserves. So the banks won't be penalized too much.
Wall: It's quite interesting because it seemed like quite a shock to markets, whereas in the west we're so used to having interest rate rises now and have a lot of preparation. Why was it such a shock?
Bell: I think the markets had expected the Bank of Japan to ease further back in October perhaps by increasing the quantitative easing program and therefore the Bank of Japan had lost some credibility in the market's mind. Therefore they wanted to regain that credibility in the face of falling inflation expectations, and that's why you saw the easing. I think the real surprise was in the method of easing, rather than expanding QE, it actually cut deposit rates into negative territory following the ECB's lead.
Wall: Of course, that is something that's completely different from what's going on in the U.S. and indeed probably this year or maybe next year in the U.K. How does this difference affect global markets and indeed investors?
Bell: Well, I think the key implication on the currency is that it means that the yen is unlikely to strengthen as much as it might otherwise have done. The yen looks very cheap relative to other currencies, and we therefore thought that the yen would strengthen. But if you're going to get continued easing from the Bank of Japan that probably caps any yen strength.
It may not weaken that much further, but it caps any yen strength and that should be supportive for Japanese equities. Generally, when you are seeing this cut in interest rates that's what boosted the equity market. So we think that Japanese equities are probably quite well supported as well.
Wall: Of course that is what we saw way back when we started to cut rates in the U.K. and indeed in the U.S. along with quantitative easing. That helped to let markets soar for five years following the credit crisis didn't it?
Bell: Yeah, I think the impact at least around this is going to be slightly less strong than that. It's not the fully busy curve of QE package that you've seen in past times. But nevertheless, it should sort of prevent severe falls in market, it kind of act as a bit of a backstop rather than really putting a sort of rocket behind the market.
Wall: What are the global implications? You've said that it is positive for those investing in Japanese equities because it will stop the yen from rising too far. Is Japan a significant enough player to have an impact globally when it makes decision like this?
Bell: Well, I think really the key implication is that other central banks such as the ECB can follow it. And what they've done with interest rates and not applying it to the whole of the excess reserves, it means the central banks can cut interest rates rather further than they would otherwise been able to. So it wouldn't be a surprise to see interest rates in Europe and in the Japanese economy go quite a bit further down than we had thought before. So you could see further deposit rate cuts both from the Bank of Japan and from the ECB and that should be broadly simulative for those economies and for the equity markets.
Wall: Mike, thank you very much.
Bell: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
