Japan Monetary Policy January 2016


Japan: Bank of Japan surprisingly adopts negative interest rates

January 29, 2016

The Bank of Japan (BoJ) caught the market by surprise when it introduced an interest-rate dimension to its quantitative and qualitative easing (QQE) program in a split 5–4 vote at its 28–29 January monetary policy meeting. Effective from 16 February, the BoJ will adopt a multi-tier scheme in which the outstanding balance of each financial institution's current account at the Bank will be divided into three tiers (a positive interest rate of 0.1%, a zero interest rate, or a negative interest rate of 0.1%) according to a certain criteria defined by the Central Bank. The positive and the zero interest rates will be applied to the existing outstanding balance and lending under any of the BoJ’s funding programs. The minus 0.1% interest rate, which will be called the Policy-Rate Balance, will be applied to any new excess reserves not included in the first two tiers. With this move, the BoJ intends to spur lending and weaken the JPY in an attempt to revitalize growth and counter mounting deflationary pressures. In this regard, the BoJ has downgraded its inflation outlook for fiscal year 2016 and 2017.

The Bank of Japan decided to adopt a QQE program and establish money supply and asset purchases as its main monetary policy mechanisms in April 2013. With the introduction of the new "Quantitative and Qualitative Monetary Easing with a Negative Interest Rate" approach, the BoJ now includes interest rates in its policy tool box.

In the same meeting, the Bank’s board members decided by an 8–1 vote to continue implementing money market operations so that the monetary base will increase at an annual pace of JPY 80 trillion (approximately USD 662 billion). In order to lower interest rates along the yield curve, the BoJ will purchase Japanese government bonds so that their outstanding amount will increase at an annual pace of about JPY 80 trillion, with an average remaining maturity of 7–12 years.

The decisions are aimed at meeting the inflation target of 2%, as long as necessary to maintain that target in a stable manner.

In its January assessment of the economy, the BoJ’s stated that healthy dynamics in both income and investment continue to support Japan’s moderate recovery. That said, risks have arisen from lower oil prices and uncertainty regarding the state of emerging and commodity-exporting economies, particularly in China. This situation will likely have a negative impact on business confidence and may put a lid on the rising underlying trend in inflation.

All of the analysts FocusEconomics polled this month expect the collateralized overnight call rate to remain unchanged at between 0.00% and 0.10% until the end of 2017.FocusEconomics Consensus Forecast panelists expect the yen to trade at 125.7 per USD at the end of 2016. For 2017, the panel projects the yen to weaken to 126.6 per USD.

Author: Ricard Torné, Lead Economist

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