Bank of Japan Enters Negative Rates

Weekly Report - 31/01/2016

Japanese Central Bank Takes Interest Rates Into Negative Territory in Bid To Stoke Inflation


The worsening outlook for global trade and economic conditions was underscored by the unexpected move by the Bank of Japan to embrace negative interest rates in an effort to keep inflation positive.  This move follows the lead of other major central banks in testing the viability of warding off deflation by implementing policies to spur spending and investment.

Weekly Review

In a dramatic turn of events, the Bank of Japan aggressively eased monetary policy further by dropping the benchmark interest rate from 0.10% to -0.10% as the Central Bank tries to avoid the creeping influence of deflation.  Although the Bank of Japan has already warned market participants that it will be unable to meet its inflation mandate, the latest move comes after the latest trade figures showed both exports and imports plunging in 2015 as major trade partners faced a slowdown.  Across the Pacific, the United States Federal Reserve opted to leave the benchmark on hold at 0.50% while leaving the door open for another hike in March but nevertheless striking a dovish tone in the statement as macroeconomic conditions continue to deteriorate.  The preliminary estimate of 4th quarter GDP at 0.70% showed growth experiencing a sharp pullback and when combined with weak durable goods spending, there is rising potential for a policy u-turn.  The Reserve Bank of New Zealand also announced its latest policy decision, leaving interest rates on hold at 2.50% but warning that additional rate cuts remain in the pipeline should inflation remain weak amid the drag from energy prices. 


The Week Ahead

The coming sessions will be dominated by global manufacturing data due to be released from major economies across the globe, beginning with China’s official and Caixin manufacturing PMI figures.  Germany, the aggregate Euro Area, United Kingdom, and United States are also set to release comparable figures on manufacturing with most data expected to show a continued deceleration or sustained contraction depending on the region.  The Bank of England and Reserve Bank of Australia are set to meet in the coming sessions to determine policy, with no major shifts in stance anticipated from either central bank and rates expected to stay on hold at 0.50% and 2.00% respectively.  The week is capped off with nonfarm payrolls and the unemployment rate from the United States.  Initial estimates are forecasting creation of 210,000 jobs during January with the unemployment rate expected to hold firm at 5.00%.  Aside from macroeconomic figures, oil will continue to play a central role in financial market volatility.  Following the unsubstantiated rumors of a meeting between major producers to cut output in an effort to spur a recovery in prices, inventory figures will be of key importance.


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