Japan’s central bank has surprised the market by taking the decision to hold interest rates at -0.1%. It was widely expected that that the Bank of Japan would announce interest rates cuts further into negative territory in today’s meeting. Instead the Bank has committed to further easing measures in a bid to boost economic growth and hit their 2% inflation target.
The stock market has rallied in response, and commentators are calling the beginning of the end for negative interest rates – predicting the European Central Bank will follow suit. The news comes against a divided backdrop; the efficiency of aggressive monetary policy across the developed world is increasingly being questioned. While quantitative easing and low interest rates push up equity and bond prices, this simply delays the inevitable market correction.
Leading investment specialists give their views below.
Takashi Maruyama
CIO Japan, Fidelity International
The announcement from the Bank of Japan is a positive surprise that will enhance the sustainability of monetary policy, while at the same time acknowledging the limits of its previous framework. I think that the new measures will prove to be far more effective. Ultimately, we need to pay attention as to whether inflation expectations develop in line with the views of the Bank of Japan.
Michael Metcalfe
Head of Global Macro Strategy, State Street Global Markets
The fact that the flattening of the yield curve has gotten to a point where it has elicited a policy response could mark the beginning of the end of quantitative easing. Just as interest rates have reached their lower bound, asset purchases, in government bonds at least, may have reached their upper bound. Other central banks, the European Central Bank especially will take close note.
Tom Becket
CIO, Psigma Investment Management
The Bank of Japan has assumed the role of chief scientist in the ongoing monetary experiment that has been pursued by global central bankers and their success or failure will be vital for how the next few years pan out. The simple fact is that investors believe that the Bank of Japan’s experiment has failed and credibility in them has collapsed. The yen has been unhelpfully strengthening and there is an argument that despite owning a terrifying amount of the bond market, they have lost control of the “long end”, judging by the rise of long-dated borrowing costs.
Kuroda-san, the governor at the Bank of Japan, has certainly tried to help Japan’s economy move out of a two-decade long period of stagnation and we respected his early efforts when he caught markets by surprise with his hyperactivity. However, the more recent decisions made in 2016 have seemed poorly thought out and plain random, particularly when the Bank cut their deposit rate to negative 0.1%.
Tomoya Masanao
Head of Portfolio Management Japan, PIMCO
The decision is in part a reflection of the Bank of Japan’s recognition that base money expansion itself has little easing effect and that Japan’s neutral yield curve, which is neither expansionary nor contractionary for the economy, is steeper than the bank would have thought. The actual yield curve should not be too flat relative to the neutral curve otherwise the economy will be negatively affected through weakening of financial intermediation.
