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Fundamental Forecast for JPY: Neutral
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The Yen has put in a significant movement so far on the day, weakening against the US Dollar by as much as 2.32%; and this is the largest movement of weakness in the Yen since January 29th, when the currency weakened by 2.7% against the Greenback after the Bank of Japan had, surprisingly, made the move to negative interest rates at the January BoJ meeting.
But that movement to negative rates hasn’t worked out too well so far, has it? The move to negative rates was likely a pre-emptive one designed to disincentive capital flows from being driven into Japan and the Yen. With Europe already deep into negative territory, the Federal Reserve taking on a ‘less hawkish’ stance and China on the verge of what could’ve quickly become a hastened slowdown enveloping the economy, the Bank of Japan saw the risk of exuberant risk-aversion flows strengthening the Yen; which threatened to undo the past three years of policy-driven movements in the Yen and the Nikkei.
So, the Bank made the move to negative at their January meeting on the 29th, and what they feared ended up happening anyways: The Yen strengthened massively and the Nikkei took a nasty turn lower. As a matter of fact, the case can even be made that the surprising nature with which the bank had acted actually contributed to the increase in panic-prone risk aversion.
The source of this morning’s weakness is on the back of an incredibly salient report that alludes to the fact that the Bank of Japan may be debating negative interest rate loans; in a similar vein to the recently enacted policy from the European Central Bank. In January, the Bank of Japan imposed negative rates on excess reserves held at the Central Bank, but if this morning’s report comes to fruition, that program would be expanded along with a deeper cut to negative rates, to offer loans to banks bearing negative rates.
Negative rates on excess deposits are, in essence, a cost for a bank; but if that same bank is offered a loan with a negative-rate from the Central Bank, that’s kind of like amortization in an asset. The negative rate on the outstanding balance decreases the loan balance; and if that bank could also make money by loaning the funds to credit-worthy borrowers, this can be thought of a form of two-way stimulus, and the bank can actually make money in both directions; on the negative rate from the Central Bank amortizing the outstanding loan balance simply from the negative rate, as well as the rate spread of what has been loaned to borrowers.