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Bank of Japan Surprised the Markets with a Negative Interest Rate

David Meyer

Bank of Japan Led the Forex Indicators

Japanese yen fell sharply

The US dollar-Japanese yen currency pair is inversely related to the yen. It rose to a high of 121.68 after the BoJ’s (Bank of Japan) monetary policy. In percentage terms, the currency pair rose by nearly 2.3%. For the euro-yen currency pair, the two countries have a similar monetary policy. As a result, the rise was less compounded. It rose by 1.4%. The negative interest rate policy came after the disappointing data release earlier in the week in terms of household spending and industrial production.

Major takeaways from the BoJ

The BoJ decided to work aggressively towards the 2% inflation target. It came up with the following major steps.

  • The new deposits that other banks park with the central bank will be charged 0.1%. In other words, the interest rate was -0.1%. Basically, this includes everything that isn’t below two tiers. It’s also called “policy rate balance.”
  • The earlier deposits, or basic balance, will continue to fetch an interest rate of 0.1%.
  • The reserves that banks have to keep with the central bank, or the macro add-on balance, won’t have any charge or interest—zero interest rate
  • The asset purchase program wasn’t expanded. The BoJ’s governor, Haruhiko Kuroda, was clear that there would be more quantitative easing if necessary.

Impact on the market

The fall in the yen correlated with the currency-based Guggenheim CurrencyShares Japanese Yen ETF (FXY). It was trading 2.3% lower on January 29, 2015. The iShares MSCI Japan (EWJ) rose by 1.2%.

Japanese ADRs (American depositary receipts) on US exchanges were trading on a positive note on January 29 after news that the BoJ ventured into a negative interest regime.

Leisure goods maker Sony (SNE) rose by 17.0%. In the banking arena, Mitsubishi UFJ Financial Group (MTU) fell by 4.6%. Sumitomo Mitsui Financial Group (SMFG) fell by 2.8%.

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