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Singapore - The yen dropped and Japanese bond yields plunged to records after central bank Governor Haruhiko Kuroda unexpectedly adopted negative interest rates.
The Bank of Japan’s (BOJ) decision halted a yen rally that was threatening to be the strongest since Kuroda took office in 2013. The currency fell against all 16 major peers after the BOJ board voted 5 to 4 to put an interest rate of minus 0.1% on current accounts held at the central bank. Kuroda said January 21 the central bank wasn’t considering negative rates. Traders are now shifting their focus to his briefing at 3:30 p.m. in Tokyo.
“They previously rejected taking rates to negative, so that was the surprise element in the announcement,” said Imre Speizer, a markets strategist at Westpac Banking Corp. in Auckland. “It weakened the yen, as it should.”
The yen slumped 1.6% to 120.77 per dollar as of 6:13 a.m. in London, after tumbling more than 2%. It slid 1.3% to 131.75 per euro.
Yields drop
Japan’s 10-year yield fell to touch a record 0.09%, while two- and five-year yields also set all-time lows, at minus 0.085% and minus 0.08%, respectively.
The BOJ retained the target for an annual expansion of ¥ 80trn ($662bn) in the monetary base. Only six of 42 economists surveyed by Bloomberg had predicted that Kuroda’s board would expand already-record stimulus at the end of its two-day policy meeting Friday. None of them projected a move to negative rates.
“This appears to be an incremental policy easing step rather than a big bang,” said Joseph Capurso, a currency strategist at Commonwealth Bank of Australia in Sydney. “I suspect this policy easing was all Kuroda could muster, judging by the slim 5 to 4 majority that voted for the policy change.
Kuroda’s challenge has much in common those facing counterparts in developed nations where inflation rates have run below policy makers’ targets, in part because of the slump in oil prices. European Central Bank President Mario Draghi last week signalled more stimulus could come in March as the inflation mandate is crucial.
The ECB unveiled a package of measures on December 3, extending its quantitative-easing program through March 2017 and lowering the deposit rate by 10 basis points, or 0.10 percentage point, to minus 0.3%.
“It’s a surprise,” said Hideaki Kuriki, a bond investor in Tokyo at Sumitomo Mitsui Trust Asset Management, which oversees $55.4bn. “They think the ECB policy is successful so they’re taking the same policy. JGB yields will go down.”
Citigroup Inc., JPMorgan Chase & Co. and UBS Group AG economists were among those giving additional stimulus at this meeting a more than 30% chance.
The central bank chief unexpectedly expanded his quantitative and qualitative easing program in October 2014 to the current pace of bond purchases, after starting it in April 2013.
