When the BOJ announced news that took the markets by storm of ‘negative rates’, the hopes were to weaken the yen. As normal macroeconomic events indicate, when rates are low, the currency weakens as domestic yielding investment is no longer as attractive. However the opposite occurred – with rates more in the negative territory, the yen rose Thursday to its strongest level since October 2014.
Through this chain of events, sudden economic indicators have proven that the Japanese economy is in worst shape than investors’ could have predicted. Corporate profits are hurting. Tokyo’s benchmark stock index remains 20% under the June 2015 peak. Inflation including energy is stuck near zero, and some measures of inflation expectations are at their lowest since since 2013. The stimulus seems to not be as effective.
Nobel Prize-winning economist Joseph Stiglitz met with top economists over the week to discuss the concept of negative rates. Negative rates are unlikely to stimulate growth, he said, while quantitative easing, the BOJ’s asset-buying program, has increased inequality and failed to spur any significant increase in investment.
But that initial success of asset-buying program, which never translated into robust economic growth, was partly due to favorable global conditions. The U.S. economy was on a healthier growth track and many thought the Federal Reserve would raise rates more aggressively—a prospect that made the dollar more attractive to investors versus the lower-yielding yen.The BOJ assumed that the U.S higher rates will result in a strong dollar which will in effect weaken the yen if BOJ were to keep rates low.
Global market turmoil sent the yen to its strongest level as investors sold riskier assets. The yen is considered a safe-haven investments. With Japan’s economy having shrunk the previous quarter, the BOJ turned to negative rates, announcing a minus 0.1% rate on some bank reserves.
At its current level, yen strength will further cut into Japanese corporate profits, which fell nearly 10% during the fourth quarter.
Dealing with an economy that may be on the brink of a third technical recession in four years and BOJ goals that remain elusive, Japanese policy makers are at least tacitly acknowledging that monetary policy alone won’t be enough. Many predict further gains ahead, and European and U.S. officials have warned Japan in recent months not to intervene directly in the market or try to “talk it down.”
According to J.P. Morgan, Junya Tanase, chief foreign-exchange strategist, the dollar, recently at ¥111.43, could fall to ¥103 by the end of the year.
By: Yael Shif
FLP Weekly Newsletter 