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JPY: The world of negative interest rates – Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 4, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet – Research Team at Nomura, suggests that the Bank of Japan hopes its negative interest rate policy (NIRP) engenders portfolio rebalancing and stimulates private demand.

    Key Quotes

    “In terms of the former, NIRP will likely weaken the yen by widening interest-rate differentials between Japan and other countries. In terms of the latter, lower interest rates are unlikely to strongly stimulate capex unless companies are short of cash and need to borrow. With Japanese companies currently flush with cash, we doubt that a reduction in interest costs would have much stimulus effect on demand through the capex channel.

    Further rate cuts likely needed to attain inflation target

    In its newly released Outlook Report, the BOJ is forecasting attainment of its +2% inflation target by FY17 H1. However, we expect the ongoing improvement in the BOJ's preferred measures of the underlying trend in prices–ie, the core-core CPI (headline CPI ex food (except alcoholic beverages) and energy) and headline CPI ex fresh food and energy–to grind to a halt. Additionally, the base wage increases negotiated in this spring's unionized wage negotiations, which BOJ Gov. Haruhiko Kuroda is closely monitoring, look likely to be somewhat restrained. Given such an environment, the BOJ will likely ease again.

    NIRP's lower bound

    How far below zero can the BOJ cut? Based on the European central banks’ negative policy rates, the BOJ seems to have the latitude to cut its interest on excess reserve (IOER) rate to at least -0.5% or thereabouts. Theoretically, negative rates' lower bound depends partly on the cost of holding physical currency. Based on gold futures prices, we estimate that the cost of storing gold has averaged an annualized 2.4% over the past 20 years.

    NIRP's side effects

    A negative IOER rate directly affects financial institutions' earnings. In consideration of this, the BOJ has stratified the bank reserves on deposit at the BOJ into three tranches, only one of which will be subject to negative interest charges. This arrangement is intended to mitigate the negative IOER rate's potential adverse impact on financial intermediation. The negative-interest tranche's current balance appears to be negligible.

    We believe the BOJ aims to drive market interest rates below 0% while minimizing the amount of bank reserves subject to negative interest charges. While the negative IOER rate is undeniably a negative for financial institutions' earnings, we see little likelihood of it having a major impact.”
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