Tag Archives: Bank of Japan

Analysis – A fine mess: Weak inflation prompts a global central bank reset

By Howard Schneider and Leika Kihara

WASHINGTON (Reuters) – It is an article of faith among central bankers that the decisions they make about how much money to create and what interest rate to charge for it will determine the rate of inflation – at least over moderate lengths of time.

For more than a decade that belief has been undermined by inflation that has remained weak despite trillions of dollars pumped into the world’s biggest economies through quantitative easing programs and ultra-low interest rates.

That prompted the top central banks to review how they do business, and on Thursday the European Central Bank joined the Federal Reserve and the Bank of Japan in pursuing an ambitious reset in hopes of reasserting control.

The ECB’s new framework, in contemplating the occasional “transitory period” when inflation exceeds its formal 2% target in hopes of ensuring that target is met over time, is a step short of the more explicit promise the U.S. central bank made last year to encourage periods of high inflation to offset years when price increases were too weak.

But their shared diagnosis paints a similarly troubling picture of a developed world seemingly set in a rut of slow economic growth, low productivity, aging populations, and perennially weak inflation that may be difficult to coax higher.

“The euro area economy and the global economy have been undergoing profound structural changes,” the ECB said in announcing its new framework, echoing language used by Fed officials in announcing their new strategy last year. “Declining trend growth, which can be linked to slower productivity growth and demographic factors, and the legacy of the global financial crisis have driven down equilibrium real interest rates.”

That, in turn, has given the ECB less room to use interest rate policy alone to help boost economic activity, and forced it, like the Fed, to resort more often to other measures – bond-buying for example – when economic conditions weaken.

The BOJ led the way down that path early this century.

The aims of the new U.S. and European inflation strategies, and those pursued so far unsuccessfully in Japan, are the same: Get the pace of price increases high enough so inflation-adjusted interest rates can also increase, giving the central banks room to use rate cuts as their main policy tool in times of stress.

CHASING AN AVERAGE

The concept of using inflation averaging has been slow to evolve. All three central banks at first adopted simple inflation targets of 2%, trusting that they understood inflation dynamics well enough to hit that level and stay there.

They didn’t.

Over time, they realized that between technology, globalization, demographics and other factors, inflation had become difficult to budge. Even more problematic, the continued “misses” against a well-publicized target risked resetting public expectations that inflation would remain weak.

Research by current and former Fed officials raised the stakes. They found that in a situation where equilibrium interest rates were low and central banks were repeatedly forced to cut their policy rates to near zero, inflation expectations would fall – permanently, a damaging outcome that would cement weak prices, wages, and growth as the norm.

Fed Vice Chair Richard Clarida, whose earlier academic research affirmed the advantages of simple inflation targeting, detailed this past January how subsequent studies by New York Fed President John Williams and others concluded more aggressive approaches were needed when interest rates were expected to keep collapsing to zero.

Interest rates stuck near zero “tend to deliver inflation expectations that, in each business cycle, become anchored at a level below the target,” Clarida said in a presentation to Stanford University’s Hoover Institution. “It can open up the risk of the downward spiral in both actual and expected inflation that has been observed in some other major economies.”

‘HISTORIC SHIFT’

The Fed’s new policy has been in place for just over 10 months. Its experience shows the challenges the ECB now faces.

The coronavirus pandemic and subsequent economic reopening have complicated the inflation outlook, with supply bottlenecks driving up prices more than – and perhaps for longer than – anticipated and a labor squeeze starting to drive up workers’ pay.

That has led to some new hawkish voices inside the Fed and hints at faster interest rate hikes from the U.S. central bank despite its stated promise to let inflation run above target “for some time.”

With the Fed yet to prove its new design in practice, bond markets have noticed.

The yield on the 10-year U.S. Treasury note, far from anticipating higher inflation and growth, has been falling, and on Thursday hit 1.25%, the lowest level since mid-February and a drop of nearly half a percentage point from mid-May.

As with the Fed, the ECB will have to translate its new strategy into policies that work.

The new strategy marks “a historic shift for the ECB,” by acknowledging inflation may need to exceed 2% at some point, wrote Andrew Kenningham, chief Europe economist for Capital Economics. But it “will not make it easy for the ECB to escape from the grips of low inflation.”

(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)

U.S. yield curve flattens, world stocks dip; focus on possible December hike

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., September 8, 2017.

By Caroline Valetkevitch

NEW YORK (Reuters) – The U.S. Treasury yield curve flattened to a two-and-a half month low and key world stock markets fell on Thursday, as investors assessed indications from the U.S. Federal Reserve that it may raise interest rates a third time this year.

The Fed, as expected, also laid out plans to begin the unwinding of a decade of aggressive monetary stimulus, but took a more hawkish than expected stance at this week’s meeting.

“The meeting was definitely more hawkish than what the market was anticipating,” said Mary Ann Hurley, vice president in fixed income trading at D.A. Davidson in Seattle.

“We were definitely not pricing in another rate hike for this year,” Hurley said.

MSCI’s broad index of global stock markets was down 0.3 percent at 486.72.

The U.S. dollar earlier rose to a two-month high against the yen, while an index that measures the dollar’s strength against a basket of currencies dipped.

A Reuters poll late Wednesday of primary dealers, the banks authorized to transact directly with the Fed, showed that the Fed will resume rate hikes in December and raise borrowing costs three more times in 2018.

In Asia, the Bank of Japan kept its monetary spigots open at full.

The Treasury yield curve between five-year notes and 30-year bonds flattened to 92 basis points on Thursday, the lowest level since July 6. Intermediate-dated debt is more sensitive than longer-dated bonds to interest rate increases.

U.S. stocks pulled back from their all-time highs, though bank stocks cheered the prospect of higher interest rates which should help their profits. The S&P bank index was up 0.4 percent, adding to Wednesday’s gains.

The Dow Jones Industrial Average fell 17.83 points, or 0.08 percent, to 22,394.76, the S&;P 500 lost 3.67 points, or 0.15 percent, to 2,504.57 and the Nasdaq Composite dropped 23.08 points, or 0.36 percent, to 6,432.96.

Emerging markets shares were lower, with an index of emerging markets down 0.3 percent.

S&P Global became the second major rating agency this year to cut China’s credit score, citing worries about the country’s rising debt levels and the risks that posed for financial stability in the world’s second largest economy.FED,

China’s markets were already closed by the time it came but it kept the pressure on emerging markets stocks.

MSCI’s broadest index of Asia-Pacific shares outside Japan closed 0.69 percent lower.

Since the start of 2014, Reuters analysis shows that the big three rating agencies – S&P Global, Moody’s and Fitch – have racked up more than 155 emerging market downgrades between them, which averages out a roughly one a week.

The Japanese yen weakened 0.11 percent versus the greenback at 112.34 per dollar. The dollar index fell 0.29 percent.

Gold fell to its lowest in almost four weeks as investors continued to assess the Fed statement. Spot gold dropped 0.7 percent to $1,291.91 an ounce.

Oil prices were down slightly before a meeting of oil producers that could extend production limits.

U.S. crude fell 0.22 percent to $50.58 per barrel and Brent was last at $55.91, down 0.04 percent on the day.

 

(Additional reporting by Karen Brettell in New York, Marc Jones in London and Hideyuki Sano in Tokyo; Editing by Bernadette Baum)

 

Bank of Japan stuns markets by implementing negative interest rates

TOKYO (Reuters) – The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Friday, stunning investors with another bold move to stimulate the economy as volatile markets and slowing global growth threaten its efforts to overcome deflation.

Global equities jumped, the yen tumbled and sovereign bonds rallied after the BOJ said it would charge for a portion of bank reserves parked with the institution, an aggressive policy pioneered by the European Central Bank (ECB).

“What’s important is to show people that the BOJ is strongly committed to achieving 2 percent inflation and that it will do whatever it takes to achieve it,” BOJ Governor Haruhiko Kuroda told a news conference after the decision.

In adopting negative interest rates Japan is reaching for a new weapon in its long battle against deflation, which since the 1990s have discouraged consumers from buying big because they expect prices to fall further. Deflation is seen as the root of two decades of economic malaise.

Kuroda said the world’s third-biggest economy was recovering moderately and the underlying price trend was rising steadily.

“But there’s a risk recent further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people’s deflationary mindset,” he said.

“The BOJ decided to adopt negative interest rates … to forestall such risks from materializing.”

Kuroda said as recently as last week he was not thinking of adopting a negative interest rate policy for now, telling parliament that further easing would likely take the form of an expansion of its massive asset-buying program.

But, with consumer inflation just 0.1 percent in the year to December despite three years of aggressive money-printing, the BOJ’s policy board decided in a narrow 5-4 vote to charge a 0.1 percent interest on a portion of current account deposits that financial institutions hold with it.

The central bank said in a statement announcing the decision it would cut interest rates further into negative territory if necessary, in its battle against deflation.

“Kuroda had been saying that he didn’t think something like this would help so it is a bit surprising and it’s clear the market has been surprised by it,” said Nicholas Smith, a strategist at CLSA based in Tokyo.

Some economists doubted the BOJ move would prove effective.

“It has gone on the defensive,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. “It made this decision not because it’s effective, but because markets are collapsing and it feels it has no other option.”

GOING NEGATIVE

Several European central banks have cut key rates below zero, and the ECB became the first major central bank to do so in June 2014.

In pursuing the same path, the BOJ is hoping banks will step up lending to support activity in the real economy, rather than pay a penalty to deposit excess cash at the central bank.

There is little sign of any pent-up demand from Japanese banks or cash-rich companies for fresh funds, however, and any money released into the system may merely be hoarded or steered into speculative activity.

“This is an aggressive all-stick-no-carrot approach to spurring investment,” said Martin King, co-managing director at Tyton Capital Advisors in Tokyo.

The BOJ maintained its pledge to expand base money at an annual pace of $675 billion via aggressive purchases of Japanese government bonds (JGBs) and risky assets conducted under its quantitative and qualitative easing (QQE) program.

The BOJ’s move – boosting the dollar by 1.7 percent against the yen – could make it even harder for the U.S. Federal Reserve to raise interest rates four times this year, as originally envisaged by its policy board.

“REGIME CHANGE”

Markets have been split on whether Japan’s central bank would ease policy as slumping oil costs and soft consumer spending have ground inflation to a halt, knocking price growth further away from the BOJ’s ambitious 2 percent target.

This is the fourth time the BOJ has pushed back its time frame for hitting its inflation target – from an initial goal of around March 2015.

Friday’s surprise interest rate decision came in the wake of data that showed household spending and output slumped in December, underscoring the fragile nature of Japan’s recovery.

Many analysts had already been suggesting that the BOJ had little scope left to expand its asset-buying program.

“I think this is a regime change and the BOJ’s main policy tool is now negative interest rates,” said Daiju Aoki, an economist at UBS Securities in Tokyo. “This shows that the ability to buy more JGBs is limited.”

Kuroda said the BOJ was not running out of policy ammunition.

“Today’s steps don’t mean that we’ve reached limits to our JGB buying,” he said. “We added interest rates as a new easing tool to our existing QQE framework.”

(Additional reporting by Stanley White, Tetsushi Kajimoto, Kaori Kaneko and Joshua Hunt; Writing by Alex Richardson; Editing by Eric Meijer and Jacqueline Wong)