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29 Jan 2016
BoJ: Negative rates surprise on the weekend – MUFG
FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, notes that in today’s decision, the BoJ announced the introduction of “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate”.
Key Quotes
“The key change of course in the introduction of a -0.10% interest rate on current accounts that financial institutions hold at the BoJ. But crucially, the implementation of the negative rates will be through a three-tier system which is:
1) The Basic Balance: A positive interest of 0.1% will be applied on the average outstanding balance that each financial institution held during benchmark reserve maintenance periods from January 2015 to December 2015. BTMU calculates that as being JPY 220trn.
2) The Macro-Add-on Balance: A zero interest rate will be applied to amounts outstanding on required reserves for each financial institution. In addition the zero charge will apply to funds outstanding through the Loan Support Program and the Funds-Supplying Operation to Support Financial Institutions related to the Great East Japan Earthquake. BTMU calculates that balance adding to JPY 38.9trn. This balance is calculated as a ratio to the Basic Balance and will change over time.
3) The Policy-Rate Balance: A negative interest rate of -0.1% will be applied to all balances in excess of (1) and (2). BTMU calculates that the balances of (1) and (2) are currently greater than the current funds at the BoJ (by about JPY 7trn) and therefore as a macro-total the negative interest rate currently does not apply. The negative interest rate will be effective from 16th February and while we do not know now how much, by then funds will be captured and charged the negative rate. But going forward as the balance sheet expands under QQE, this balance will grow in part based on a currently unknown calculation of how the balance in (2) changes.
So the first point based on this tiered system is that from the start the impact from the negative interest rate will be small but will become more significant as QQE continues going forward. With asset-buying ongoing, the balance ending up in the Policy-Rate Balance will inevitably increase notably.
But the impact has been immediate with the JGB yield curve now in negative territory out to eight years. The 10-year JGB yield has by 10bps to yield just 0.12%. With this particular Rubicon now crossed financial market participants will no doubt quickly start to price in the potential for additional moves going forward. A negative 10-year JGB yield now looks highly likely.
In regard to the yen Governor Kuroda has emphasised that the BOJ does not target the yen and that was not the driver behind the decision today. This is of course common central bank mantra and no central bank in the world is focusing in its exchange rate!”
Key Quotes
“The key change of course in the introduction of a -0.10% interest rate on current accounts that financial institutions hold at the BoJ. But crucially, the implementation of the negative rates will be through a three-tier system which is:
1) The Basic Balance: A positive interest of 0.1% will be applied on the average outstanding balance that each financial institution held during benchmark reserve maintenance periods from January 2015 to December 2015. BTMU calculates that as being JPY 220trn.
2) The Macro-Add-on Balance: A zero interest rate will be applied to amounts outstanding on required reserves for each financial institution. In addition the zero charge will apply to funds outstanding through the Loan Support Program and the Funds-Supplying Operation to Support Financial Institutions related to the Great East Japan Earthquake. BTMU calculates that balance adding to JPY 38.9trn. This balance is calculated as a ratio to the Basic Balance and will change over time.
3) The Policy-Rate Balance: A negative interest rate of -0.1% will be applied to all balances in excess of (1) and (2). BTMU calculates that the balances of (1) and (2) are currently greater than the current funds at the BoJ (by about JPY 7trn) and therefore as a macro-total the negative interest rate currently does not apply. The negative interest rate will be effective from 16th February and while we do not know now how much, by then funds will be captured and charged the negative rate. But going forward as the balance sheet expands under QQE, this balance will grow in part based on a currently unknown calculation of how the balance in (2) changes.
So the first point based on this tiered system is that from the start the impact from the negative interest rate will be small but will become more significant as QQE continues going forward. With asset-buying ongoing, the balance ending up in the Policy-Rate Balance will inevitably increase notably.
But the impact has been immediate with the JGB yield curve now in negative territory out to eight years. The 10-year JGB yield has by 10bps to yield just 0.12%. With this particular Rubicon now crossed financial market participants will no doubt quickly start to price in the potential for additional moves going forward. A negative 10-year JGB yield now looks highly likely.
In regard to the yen Governor Kuroda has emphasised that the BOJ does not target the yen and that was not the driver behind the decision today. This is of course common central bank mantra and no central bank in the world is focusing in its exchange rate!”