George Cole, Research Analyst at Goldman Sachs, notes that at its January policy meeting, the Bank of Japan cut rates into negative territory, implemented via a three-tiered system of rates on reserve holdings. Key Quotes “This followed the ECB, who after spending over a year with a negative deposit rate, renewed rate cuts at its December meeting. To understand the impact of these actions and the new possibilities of negative rates they introduced, we look at the market-implied probability distributions of front-end rates, extracted from options on short-term interest rate futures. From these distributions, we can obtain estimates for cumulative probabilities and the skew of the distributions. The impact of the BoJ on the market-implied distribution of JPY interest rates was significant, with the market not only pricing the level shift lower in rates, but also rapidly pricing a very high probability of further cuts deeper into negative territory. There is a similar evolution in the probability of cuts for the Euro area, which after the January ECB meeting sits at over 70%. Both curves show an overall skew towards lower rates, suggesting we have not yet found the effective lower bound to interest rates in Europe and Japan.” For more information, read our latest forex news.