Yen at the Narrow Ledge, BOJ Taking a Step Forward

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Description: BOJ’s Haruhiko Kuroda announced no changes in the controversial negative interest policy. What does this mean for Japanese economy, and how long will this situation last?
 
According to an interview that BOJ’s Governor Haruhiko Kuroda gave recently to the Sankei newspaper in Japan, it seems that BOJ is going to continue with its dubious policy of cuts as pertaining to the negative interest rates. Ever since it was introduced last February, this policy has been quite controversial (with analysts and brokers such as WMoption alike) due to the losses it has incurred and the obvious lack of anticipated and predicted results. Let’s see what happens next.

(Un)predicted Consequences

The entire purpose of this policy was to spur economic growth in an otherwise stagnating economy, and maybe stimulate exports through controlled inflation. However, no significant results have materialized over the last half a year that this controversial policy has been in place. And now that Kuroda has announced he has no intention of discontinuing this policy and plans to further increase the cuts to the negative rates, it would seem that the resistance both within Japan and outside will only increase, along with the pressure.

If at First You Don’t Succeed…

The rationale behind such logic is that the move that was undertaken last February was sound, but that the cuts were not deep enough and that a renewed, increased effort will change all that – hopefully for the better. Of course, just because the BOJ’s negative rate policy has yet to reach its utmost limits, it does not mean the strategy is working, nor that it should even happen. Apparently, Mr. Kuroda has seen the extent to which European central banks are willing or able to go, and plans to follow suit, for whatever reasons he may have.
Of course, it is well within his rights to do so, and there is definitely room for further actions in this direction. However, what is being disputed is the purpose of such actions, as more and more investors and analysts are getting sceptical about its prospects. Just because their backs have yet to technically reach the wall, it does not mean that they are not in serious trouble.
The minus 0.1% rate on certain deposits placed by certain banks at the central bank of Japan has certainly had a profound effect, even if said effect was more psychological than anything else. It was supposed to discourage hoarding financial assets and “encourage” investors into a taking a more proactive stance, but all it seems to have accomplished is to get them to move assets elsewhere, in accordance with their possibilities.
Of course, this did not catch that many investors with their pants down, although it should have stimulated bank lending and all this excess money should have resulted in an increased rate of inflation as well as higher spending. However, six months into this policy, any of this has yet to take place. It would seem that the policy is failing to achieve its fundamental purpose any way one looks at it, provided the person in question is not Governor Haruhiko Kuroda.

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Speaking of Changes…

The Bank of Japan has certainly seen its fair share of dubious policies as of late, but even if they refuse to reconsider the policy on their negative rates, it seems they are far less certain about their plans to invest 80 trillion yen, which amounts to $798 billion on an annual basis in various assets. This massive purchase represents one of the immediate expenditures that are likely to be the first to see any real cuts. Still, we will know more about what Governor Kuroda and Bank of Japan have decided next month.
In a few weeks, they plan to assess their monetary policies and decide if their massive investment plans need any changes. Of course, this investment is not for investment’s sake – it is the method that the Bank of Japan has chosen as a form of “quantitative and qualitative easing”. Introduced in 2013, its design was to bring the inflation rate in Japan to 2 percent and keep it that way. Needless to say, these measures have also failed to meet their proclaimed mark, with inflation running amok (by Japanese standards, mind you) and the overall lack of economic growth.

Conclusion

Despite all the scepticism surrounding it, it seems as though these policies might still work, even though it is highly unlikely at this point. The Bank of Japan is going to make a statement regarding the assessment of their monetary policies next month, along with any actions that they plan on taking. This story is far from over.

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