Friday, January 29, 2016

Dear Japan, That Is So Negative--UPDATED

From Marc to Market:

The Bank of Japan surprised the market.  It did not expand its asset purchase plan, which was the main focus of many market participants, including ourselves.  Instead, following a rash of disappointing data, the BOJ introduced negative interest rates on some excess reserves and vowed to do more if necessary.  

Today's action, like the expected decision in October 2014 to increase what Japan calls Quantitative and Qualitative Easing was on a 5-4 vote.  It has sent the yen and Japanese interest rates sharply lower while lifting equity prices.  The dollar initially soared to nearly JPY121.50 from JPY118.50.  There are large option strikes today for the NY cut, including $1.75 bln at JPY120 and $3.5 bln at 121, according to reports.  There is also talk of a large barrier struck at JPY121.50.  The yield on the benchmark 10-year JGB was more than halved to 9 bp.  The yield curve is negative going out through eight years.  

In a volatile session, the Nikkei closed 2.8% higher.  It had initially traded below yesterday's lows and then rallied and closed above yesterday's highs.  It finished above its 20-day moving average for the first time since early December.  Financials were the strongest sector in the Nikkei, adding on almost 5.6%  though bank shares themselves fell 2.3%.  In the broader Topix index, financials underperformed. While the Topix rose 2.9%, financials rose 1.8%, and the bank sub-sector lost 2%.  

The negative rates will not be as widely applicable as the ECB's negative rate regime.  Most of existing excess reserves will still earn 10 bp annualized.  A sub-category of reserves referred to as the policy rate balance will be charged 10 bp.   Based on holdings as of the end of last year, the policy rates balance held JPY21 trillion.  As the BOJ continues to expand its balance sheet, the policy rate balance will likely increase by about JPY6 trillion a month....MORE
See also:
Dear Japan, That's So Negative II