Bank Of Japan Monetary Policy Meeting - March 2016

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• published: 14 Mar 2016
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Welcome to the Investors Trading Academy event of the week. Each week our staff of analysts and educators tries to provide you a better understanding of a major market event scheduled soon and that have an effect on the global markets. With big central bank events ahead, we want to look at the one that is getting the least attention, but the one that could have the biggest punch, the Bank of Japan. After the ECB last week and the FOMC on Tuesday and Wednesday of this week, many traders are paying little attention to the BoJ. Even last week the move by the Reserve Bank of New Zealand barely made the headlines after the bank surprised and reduced their rate by 25 basis points. The Bank of Japan surprised markets on January 29 by cutting rates to negative. Prior to that move, we made the case that they needed to act. The market was ripe for it. They surprised many. But they haven’t gotten the desired effect. Since they cut their deposit rates below zero, the yield on the 10 year Japanese government bond has gone negative. And the 20, 30 and 40-year bond yield has collapsed too — indicating the market doesn’t believe Japan will ever emerge for the deflationary vortex. On that note, the move to negative rates hasn’t worked thus far. And when it comes to stocks and the yen, they’ve gotten the opposite of what they need and want. This monetary easing, which imposes a minus 0.1 percent interest rate on a portion of the new reserve accounts held by private financial institutions at the central bank, is the third major action conducted by the governor of the bank, Haruhiko Kuroda, who took the position in 2013. Kuroda’s first two major actions as governor were significant increases in government bond purchases. Ominously though, this is the first time his actions have failed to lead markets in the desired direction, one which is favorable for the Japanese economy. As a result of the negative interest rate, Japanese government bond yields decreased but the stock market declined, and despite a fleeting initial depreciation, the Japanese yen has sharply appreciated. Even though these market reactions were mainly caused by the rise in uncertainty regarding the outlook of the global economy, at the same time, it illustrates the simple fact that without desirable conditions in the global economy and markets, it’s difficult for Kuroda to make the bank’s monetary easing policy bring about the intended positive effects on the markets. Bank of Japan Governor Kuroda faces pressure to hold fire as a monetary policy meeting approaches this week, despite gloomy economic conditions. It is an unusual situation for a central bank chief who has talked gleefully of unleashing a monetary “bazooka” and vowed to do whatever it takes to put the nation’s economy back on a path to stable growth. But the BOJ’s latest move—negative interest rates—has created a backlash in Japan, leaving Mr. Kuroda and other BOJ officials scrambling in recent weeks. Pushing rates deeper into negative territory now could worsen the outcry and damage public confidence, and an expansion of its asset-purchase program might have little effect, people close to the central bank said. By Barry Norman, Investors Trading Academy - ITA