Japan – BoJ joins global reflation efforts

by: Nick Kounis

The BoJ became the latest central bank to join global reflation efforts by cutting its interest rate on new excess reserves into negative territory. Some may fear that this represents the latest round in a ‘global currency war’ and indeed the yen weakened significantly this morning. It is possible that fears of competitive devaluation can destabilise markets. However, in big picture terms, easier monetary policy globally is part of the solution rather than part of the problem. Global growth is weak and global inflation is falling. If the world had a single central bank it would probably be easing right now. In a way, currency moves are a rather inefficient way to get that co-ordination. For instance, a weaker yen could now put some additional pressure on other central banks to ease.
The BoJ’s negative rate system differs from that of the ECB. For excess reserves, the BoJ has a dual system as it will only be new reserves that will face the 10bp charge. Existing balances will continue to earn a rate of +0.1% (while required reserves will earn no interest). This has the advantage of cushioning the blow for commercial banks but has the disadvantage of making the impact on market interest rates less significant. Having said that, the BoJ has left the door wide open to cut the rate on new reserves (now the policy rate) deeper into negative territory. So this move may actually also just be to test the water. We continue to see further yen weakness ahead. Our year-end forecast for USD/JPY is 130.