UBS: Positively negative
In an apparent volte face, the Bank of Japan introduced negative interest rates, much to the surprise of the markets.The market reaction was much stronger than the reaction to the ECB's introduction of negative rates. It was also more widespread, suggesting that markets might be now expecting a dovish reaction by the ECB and the Federal reserve.
02.02.2016 | 11:38 Uhr
Never trust a central banker, at least not one that you would actually entrust with control of monetary policy. Just a couple of months after ruling out a further cut in interest rates, Bank of Japan (BOJ) governor Kuroda Haruhiko announced negative interest rates. Governor Kuroda does seem to enjoy surprising the market, and some wonder whether he misled the market on purpose in order to maximise the surprise.
It is more likely that Governor Kuroda simply changed his mind and decided that the economic situation demanded more action. That is why you should not trust a good central banker: they should do what is best for monetary policy, not what keeps the market happy.
The Japanese negative rate is somewhat more complicated than that of the ECB, and is closer to those of Switzerland, Sweden and Denmark. The negative rate applies only to marginal increases in cash rather than all cash. Existing levels still get paid 0.1%, required reserves (and a few other things) get 0% but the remainder will get -0.1%. The equivalent from a personal perspective is that your bank pays you interest on most of your deposits, but pays zero on some. Then any increase in deposits you make would be penalised with a negative rate. This might change the amount you decide to deposit. You could hold more cash, but that brings risk of loss or theft. So the alternative is to spend more.
The difference for the banking system is that they cannot really control the level of their reserves at the central bank. When the BOJ creates money through their Quantitative and Qualitative Easing programme (QQE), they credit the reserve accounts of the banks they do the transactions through. That bank can then take the money out and use it for something else (e.g., a loan), but that money will ultimately end up in another bank. Asides from cash, all digital money is a claim against the central bank. So the BOJ is increasing the amount of money in the system and charging banks
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