Let’s review the tale of the tape in Japan following Bank of Japan governor Haruhiko Kuroda’s decision to take interest rates negative on 29 January. The yen is stronger, stocks are down 5.5% and the interest rate on ten-year Japanese government bonds went negative overnight.
And this is our model for future monetary policy?
To be fair to Kuroda, Japanese stocks fell 5% overnight. But even so, it’s not a great start to a new era of negative interest rates is it? Investors are now front-running the bond market, expecting even more negative rates from the Bank of Japan.
They’re dumping stocks
That’s not what’s supposed to happen, according to the negative interest rate policy (NIRP) textbook. Japan’s finance minister took to the podium to say as much in Tokyo. He said, “It’s clear that recent [yen] moves have been rough. I’ll keep a close watch on movements in the foreign exchange market”. Kuroda and the Japanese prime minister, ShinzĹŤ Abe, want a weaker yen to boost Japanese corporate earnings and stock prices.
Instead, they get a weaker yen and a rush into bonds. But I would suggest that this is more than investors just front-running the next move from the central banks. It has a whiff of desperation, and even derision. The central banks have power, but they aren’t in control. Money is moving towards anything that looks like a safe haven.
Category: Central Banks