The BoJ hinted that it would continue to relax or sink deeper into the negative interest rate mire

 The BoJ hinted that it would continue to relax or sink deeper into the negative interest rate mire

The previous forward-looking guidance is to maintain the current large-scale monetary easing policy at least until the spring of 2020.

The revised forward-looking guidance is to clarify the policy tendency of the central bank for further easing, and it is expected that the current large-scale monetary easing policy will not be ended by spring 2020. Interest rates are expected to remain low or even lower. The downside risk of overseas economy is large, and the pace of recovery is expected to be later than expected. Bank of Japan governor Kuroda tohiko said at a press conference on the same afternoon.

Negative interest rate is sinking deeper and deeper

So what is left in the BoJs toolbox?

The central bank can further cut interest rates, expand the scale of asset purchase or accelerate the expansion of the base currency scale. There is still a lot of room for us to use. The specific tools we use depend on the development of the economy, prices and financial markets. Kuroda said.

Prior to the interest rate resolution, the mainstream market view is that the BoJ will maintain the current policy, because the recent local consumer sentiment is stable, the yen exchange rate trend is not strong, and the Sino US trade friction is now easing. But there are also market participants who expect the bank to further cut the negative interest rate level and cut the current - 0.1% short-term interest rate by another 10 basis points. Tetsuufumi Yamakawa, chief economist of Barclays Bank in Japan, expects the bank to act in January 2020.

Since the implementation of large-scale monetary easing policy in early 2013, the Bank launched a negative interest rate in early 2016, but the inflation target of 2% has not been achieved, and the effectiveness of the policy has been questioned.

I am skeptical of the effect of negative interest rates. The policy framework that controls the yield curve has played a certain role in stabilizing the bond market, but it is obvious that monetary policy has its limitations. Bryan Collins, head of fixed income and fund manager of Fidelity International Asia, said in an interview with 21st century economic report.

On the other hand, the distortions and side effects of low interest rate and negative interest rate policies on financial markets are obvious.

According to data provided by Fidelity International, before the financial crisis (at the end of June 2007), the yields of ten-year Japanese government bonds and corporate bonds were still around 2%, and at present, the yields of both were around 0%.

When I joined Fidelity International in 2006, I was a trader. At that time, we were more active in trading Japanese bonds, but the yield was very low at that time. I remember trading Japanese corporate bonds at that time. But at present, there is no Japanese bond position in the Asian Fund I manage. The Japanese bond market is currently owned by local investors, which is much more interesting for us. Collins said.

Global Japanization spread

The Bank of Japan released its biennial financial system report on October 24, which said that due to the long-term low interest rate environment in China, the profitability of financial institutions continued to decline. On the one hand, the long-term low interest rate level led to the continuous narrowing of the interest rate gap between deposits and loans; on the other hand, population problems inhibited the long-term growth prospects, resulting in the long-term downward trend of credit demand.

The report also pointed out that Japanese financial institutions hold more and more complex financial products and loans in order to pursue yield, especially the increasing overseas exposure, including the scale growth of loans from overseas low rating and non investment grade companies faster than that of European and American peers, so the financial system has accumulated a lot of risks.

Under the influence of low growth, low interest rates and radical monetary easing, the market is obviously distorted. There are $17 trillion of negative yield bonds in the world, which is really embarrassing for investors. Japanese government bonds havent appeared in the eyes of investors for a long time. Even local investors in Japan started to look for yields overseas very early. We also manage assets for Japanese customers. They look for yields everywhere in Europe and Asia. Collins said.

With Japan and the euro area sinking deeper and deeper in the negative interest rate level, many central banks around the world have started monetary easing again. This trend is nicknamed Japanization by many investors. The long-term low interest rate environment undoubtedly brings great challenges to global investors. Many traditional safe assets no longer provide positive returns. In order to ensure returns, global investors are chasing returns everywhere, But at the same time, the risk is also growing.

Then there are European investors looking for yields in Asia and emerging markets, which are expected to continue for a long time. We have received more and more European customers who want to invest in Chinese government bonds, Asian dollar real estate corporate bonds, etc., which is expected to only increase or not decrease. Collins said.

Source: responsible editor of 21st century economic report: Yang bin_nf4368