Negative Rates Backfire in Japan

Market Trends - 09/02/2016

Even after implementing the most aggressive actions since Abenomics began, the Bank of Japan has seen poor results from its latest shift in monetary policy.  The Japanese Yen, which immediately weakened following the move to slash interest rates the other week, has since strengthened dramatically and continues to push higher against peers including the US dollar as rising concerns about the trajectory of the global economy leads to growing risk aversion amongst investors.  This is no more evident than the increasing demand for haven assets, particularly the upside acceleration in gold which has seen prices climb to the highest levels since June.  Although traditionally easing monetary policy would lead to a weakening in the local currency, this has not been the case for Japan after all post-decision gains were erased late last week.  The continuing global equity rout has led to a widespread unwind in risk assets and specifically the Yen carry-trades with USDJPY in freefall since February 1st.

Although other advanced economies such as Switzerland, Denmark, Sweden and even the Euro Area have experimented with negative rates, nowhere has the failure been more evident than Japan which is facing an economic onslaught from all angles.  Not only is Asian trade going through a prolonged downturn, but it is causing rampant deflation across the region, with Japan suffering intensely from the development.  Notwithstanding missing the inflation target, wage growth has remained a sticky problem for policymakers.  Despite reporting record profitability over 2015, Japanese corporations in no way passed along these gains to employees, with wage growth largely stagnant over the last year.  Negative interest rates may have been the easiest way to preserve the weakness in the Yen after the Bank of Japan cornered the Japanese bond market and did not want to expand its equity footprint, however, unless it translates to increased competitiveness and spending in the local economy, the move will have been for naught.  With nowhere left to hide, expectations are for the Yen to continue appreciating as the global outlook deteriorates further.


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