29th January 2016
The Japanese central bank has shocked the market but moving interest rates into negative territory and experts fear where it could lead.
Here the experts give their verdict on what the move to -0/1% interest rates means for the Japanese economy, global markets and investors.
The path of no return
Genzo Kimura, economist at SuMi Trust
‘The risk of a negative interest rate policy is that it can fall into the abyss. If inflation doesn’t meet the 2% target, the Bank of Japan (BoJ) will be forced deeper and deeper into negative territory each time a weak inflation outlook is issued. We could see rates falling to -1% in the future.
‘The first victims of this policy are the banks and Japanese banking stocks reacted negatively to today’s 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%), but because incomes are not high enough. Therefore, we have real doubts about the impact of negative interest rates.
‘Last month presented a similar eerie feeling when the BoJ decided to implement supplementary measures. This announcement was very confusing and not well communicated to the market in advance. We suspect that the decision didn’t come directly from (governor of the BoJ) Mr (Haruhiko) Kuroda, but was made by BoJ staff.
‘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.’
Still value in the market
Adrian Lowcock, head of investing at AXA Wealth
‘The BoJ has cut interest rates to -0.1% as it drops it’s headline inflation outlook for 2016 to 0.8% compared to 1.4% announced three months ago, no doubt partly driven by further falls in the oil price. The cut in rates is also in response to concerns over a Chinese slowdown and strengthening Yen. Whilst the headline figure is negative the BoJ has introduced a tiered system and the negative interest will only apply to new balances.
‘The decision has caught many by surprise as further quantitative easing (QE) was expected but not negative rates. Stock markets have reacted positively to the announcement and taken it as a clear sign that central banks are still willing to support markets. The rate cut also seen as an indication the Bank is determined to reassert inflation, although the 2% target has been pushed out even further to 2018. The cut has also weakened the Yen, which is good for Japanese exports as they become cheaper.
‘Japan narrowly avoided recession last year and there are signs that consumer demand is improving whilst unemployment continues to fall. The initial reaction to the announcement is likely to peter out and Japan remains susceptible to further global weakness. However there is value in the market and we remain positive on Japan as the government continue to seek a weaker Yen and return of inflation. In addition we are beginning to see the impact of prime minister Shinzo Abe’s third arrow of structural reform.’
Lowcock suggested investors look at the GLG Japan CoreAlpha fund if they want exposure to the country.
He said: ‘The fund is focused on Japanese large cap value, which has been lagging the market, and tends to have a bias toward those companies with an above average yield. [Manager] Stephen Harker is a contrarian investor, actively looking for companies out of favour with investors…He selects companies with strong fundamentals where he believes there is the opportunity for a turnaround.’
A short term benefit
Stephen Allen, senior investment manager at Architas
‘Most of the debate ahead of the scheduled BoJ meeting today was around the level and timing of further possible quantitative easing in a bid to boost economic growth and stubbornly low inflation. In the event there was no change to the level of the existing programme but instead an unexpected move by governor Kuroda who surprised the market, as he likes to do. He announced a move to negative interest rates, cutting the key deposit rate from 0.1% to -0.1% in a bid to spur the economy on, effectively charging depositors for saving rather than spending or investing.
‘Although the absolute move itself is small it is more about the intention and direction that Kuroda wants to communicate – that they will do anything to get some inflation in to the system. With a weak oil price it has become even more difficult to get anywhere near Japan’s long term goal of 2% inflation and they moved this target even further out today to 2018. I guess if you can’t achieve it now, either give up (unacceptable) or give yourself more time, and this is probably not the last time the target is pushed out.
‘Over the short term there was unsurprisingly an instant weakening of the Japanese Yen by almost 2% against sterling and the dollar and a near 3% upwards move in the stock market, although financial names took a tumble. What will concern investors is that this upwards move in the market could perhaps be very short lived as the rate move could be viewed as something of a last resort and an admission that quantitative easing on its own has not delivered the necessary results to the economy, and that the Japanese government bond buying programme has perhaps nowhere else to go, given the level of Government ownership already. On the other hand you can take positives that there is a still a clear willingness by the BoJ to do whatever is necessary to get corporates and the public spending again and in theory the move should be positive for wage growth and for shareholder returns.
‘A weaker yen should, for now at least, be a boost to exporters and we would see funds having exposure to that sector the key beneficiaries and funds exposed to financials taking a hit. On a relative basis to other equity markets we remain positive on Japan but have become more cautious over the shorter term of the impact of a general slowdown in China. We removed our hedged exposure to Japan early last year but even before today’s announcement we have been debating whether it is once again time to hedge some of that Yen exposure as the BoJ seems intent on weakening the currency.’