The Bank of Japan unleashed a shock negative interest rate announcement upon unsuspecting markets in the Asian session- Kuroda, having done a full 180 degree turn in less than a week buoyed stock markets and sent the Japanese Yen (JPY) plunging against the US Dollar.

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The markets reeled from the unexpected news today as it broke, sending the USD spiking against the JPY.

Why all the fuss?

Until now only several European Central Banks have implemented negative interest rate policy (NIRP) and the Bank of Japan was broadly expected to not take their rates negative until the successful vote for the policy shift last week.

The negative interest rates act as a mechanism to force liquidity (in the form of excess reserves held with the central bank) out into the open market.  This is why stocks floated (seeking reserves seeking yield) as well as the Yen moving based on future inflation expectations.

Where from here?

The Bank of Japan has been undertaking a huge QE program, and unprecented monetary policy in the form of Abenomics in order to try and maintain inflation after decades of staglation, but it has been met with limited success.  It is likely that this is an effort to throw more fuel on the monetary fire which Abenomics started.  It’s likely that from a policy perspective the Bank of Japan is now cornered on the ropes- with a historical probability of default at over 0.90, given their Sovereign Debt to GDP ratio, nothing short of a miracle will avoid a default in the longer term.

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While it’s highly unlikely they will run afoul of international creditors given that most of their sovereign debt is held internally, the BoJ is entering a dangerous period for monetary economics. They’ll need to exercise discipline and be prudent moving forward.  In short: be careful what you wish for Abe.

The Japanese should be careful to be certain they get exactly what they wish for with their policies.  This monetary situation could easily be the “Monkey’s Paw” of monetary policies.  Care and smart policy is needed, which I hope they will enact, lest they become a cautionary tale like Venezuela.

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One thought on “Bank of Japan goes NIRP.

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