WM Market Reports

Bank Of Japan's Shock Decision To Go Negative: What Wealth Managers Say

Amisha Mehta Assistant Editor 1 February 2016

Bank Of Japan's Shock Decision To Go Negative: What Wealth Managers Say

The wealth management industry reacts to the world's third largest economy taking its interest rates into negative territory to boost investor sentiment and spending.

In a surprise move last week, the Bank of Japan adopted negative interest rates for the first time to encourage banks to lend more and ultimately drag the economy out of low inflation.

The move to a negative interest rate of -0.1 per cent, which came after a narrow five-four vote at the BoJ's meeting on Friday, means commercial banks will now be charged by the central bank for some deposits. The bank said it would cut interest rates further “if judged as necessary” and would continue to do so to achieve an inflation target of 2 per cent.

In reaction to the announcement, Tokyo's Nikkei 225 closed 2.8 per cent higher in Friday trading while European stock markets also opened higher. However, several wealth managers have expressed doubt as to how much the rate cut will actually affect Japan's economy, which has been struggling for growth since the 1990s despite prime minister Shinzo Abe's introduction of a recovery strategy dubbed "Abenomics". Japan has so far failed to reach its target inflation rate through low interest rates and other stimulus measures.

Sanjiv Shah, chief investment officer at Sun Global Investments

“The decision to introduce a negative rate may seem like a bold move by the Bank of Japan, but in reality it reflects the lack of options available to tackle the longstanding two-decade long deflationary pressures. Abenomics has really hit the limits of effective action. The only option for sustainable progress for Japan is deep structural reform under the so-called third arrow of Abenomics. 

“The policies of currency devaluation and monetary stimulus have been well and truly exhausted now and there is little reason to think that negative interest rates will make any difference.”

Keith Wade, chief economist at Schroders

“The move also follows a difficult period for Japan which has seen some weak activity indicators and the yen rise significantly over the past month, thus diminishing the prospects for hitting its 2 per cent inflation target. In particular, the yen has borne the brunt of China’s new exchange rate policy and at one stage this month was up 4 per cent in trade-weighted terms. It has now fallen back, but alongside today’s action the BoJ has pushed out its target for inflation to return to 2 per cent by six months to the middle of 2017. 

“So despite the market reaction this move comes out of weakness and also raises the risk that China may retaliate with a further depreciation of their currency. If so, we will have entered a new phase in the currency wars where countries fight over a limited amount of global growth, an outcome which does not bode well for risk assets.”

Kok Wei Yee, portfolio manager of Fidelity Japan Active Growth Fund

“The BoJ’s implementation of negative interest rates is a welcome boost for global investor sentiment and business confidence. The actual impact on company funding rates in Japan or the real economy is not that big, so in terms of overall impact this is actually smaller than the BoJ’s previous easing measures. 

“However, the recent market sentiment fear is probably more of a crisis of confidence, given the uncertainty over China and the uneasiness as the US Fed begins a phase of interest rate hikes. The BoJ is well aware that significant market turbulence can negatively affect the real economy, and the easing measure is more of a pre-emptive and symbolic move. The ECB appears ready to do more and the US Fed is being flexible in adjusting monetary policy, all of which is very bullish for asset markets. Global policymakers will stay supportive of economic growth and remain vigilant against negative growth effects from asset market volatility.”

Trevor Greetham, head of multi asset at Royal London Asset Management

“Concerns over growth in China helped to trigger a plunge in chronically over-supplied commodity markets. A deflationary shock like this will always be met with monetary easing. With investor sentiment deeply oversold we have been buying equities and remain overweight Europe and Japan, the regions where policy is loosest.”

Genzo Kimura, economist at SuMi TRUST
“The first victims of this policy are the banks and Japanese banking stocks reacted negatively to the announcement. At this moment in time, we can’t be certain that negative rates will help the Japanese economy. The reason that people don’t buy houses or cars is not because mortgage rates are high (the 30-year adjustable rate mortgage is currently at 0.65 per cent), but because incomes are not high enough. Therefore, we have real doubts about the impact of negative interest rates.
“With inflation remaining very weak, we could see negative interest rates sink deeper and deeper. It seems that the BoJ is heading onto a path of no return and the market should be prepared for more market volatility to come.”

Wouter Sturkenboom, senior investment strategist at Russell Investments

“The economic run-rate and the earnings deceleration are so problematic, that the market needs all the help it can get from the BoJ. With today's move mitigating downside risks, we are more confident about a bounce.

“The implications for the US Federal Reserve are mixed. The currency dynamic should be an argument for the Fed to stay its hand on a rate rise in March. However, the Fed cannot imaginably like having to juggle the rest of the world's growth needs, as well as treading a delicate normalisation path in the US itself. If Japan and Europe show a greater willingness to take care of their own policy needs well, that unties the Fed's hands and gives them greater leeway to tighten in March, if they see fit.”

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