Bank of Japan's Next Move in Late April after the Disappointment of Negative Rates

TOKYO, Japan - May 6, 2016 - PRLog -- The recent experiment of the Bank of Japan with negative interest rates has not produced any encouraging results till date, and thereby Japan's central bank is running out of options.

Jonathon Price, the director of Mergers & Acquisitions for Nikko Holdings who oversees all corporate allocation of assets explains: "They have tried using negative rates to stimulate the markets but you and I know that it hasn't worked, so we are anticipating that their next move will probably be directed at the stock markets". This further quantitative easing expected of the bank is due to the fact that inflation still remains well below the 2 percent mark targeted by the bank. The next policy announcement from the bank is scheduled for the 28 of April.  It may then become clear if the government will be making any moves to stem the strengthening Yen, which is creating concerns among exporters.


The central bank has traditionally focused its massive 80 trillion Yen, about $700 billion a year quantitative easing budget on the purchase of Japanese government bonds (JGBs), Japanese Real Estate Investment Trusts (J-REITs) and selected Exchange Traded Funds (ETFs). But that strategy seems to be reaching its limitations now as the Bank of Japan currently holds over 30 percent of Japan's government bonds. Jonathon Price explains further: "What all this has come down to now, is just a massive build-up of excess currency reserves in the country's banking system."

The negative interest rates had a negative effect.

Having piled up enough government bonds, the BOJ must have in desperation turned to negative interest rates in January. As it turns it, the negative rates policy has not brought about much positive results. Rather than the expected weakening of the Yen with this policy, the currency instead continued to strengthen.

A survey of some of Japan's largest manufacturers last week by the central bank showed that the majority of manufacturers maintain a negative outlook especially after the disappointment of the negative rate policy.

Mr Price of Nikko holdings explains that the central bank is expected to increase its purchase of Exchange Traded Funds by about 5 trillion Yen, with a comparable increase in the purchase of J-REITs.

The central bank may also increase its JGB purchases, a move which is favored over the purchase of foreign bonds or instruments. As the prime minister, Shinzo Abe has said recently, the Japanese government and economy must avoid all forms of competitive devaluation and that he thinks the government must stay away from all manner of intervention in the currency markets. Without such a strong statement from the prime minister, it would have been safe to assume that the central bank may try to purchase foreign bonds. Such a move will most likely bring about the desired weakening of the Yen, solving one problem at least, but with the prime minister's statement, any such announcements are not expected in the next policy meeting statement.

Jonathon Price explains that the prime minister's statement is a bad signal to the market and to investors, meaning that the bank will not be stepping in to stem the strengthening Yen. This is an especially very difficult period for corporate Japan as most Japanese corporations are hedged at 115, therefore the Yen, which is currently at 109 is bleeding them dry and if it goes lower, then the effects will even be more disastrous.

The Yen is currently at 109.47 Yen to the Dollar, which is its strongest rate since October 2014.

Although the Yen traded at 120 Yen to the Dollar in January of this year, its rapid strengthening and sustained strength poses a huge economical problem to an already economically troubled Japan.

The Central Bank of Japan has not always gotten it wrong. "Take for instance the inflation figures", notes Mr. Price, Japan has the best inflation performance of all the G10 countries. Over the last three years, the economy was able to reverse a slight economic recession with an inflation rate of a negative 0.5, into a 1 percent inflation rate. "The central bank's performance is definitely laudable", adds Mr. Price.

There is also some comforting news from the Tankan report that was published last week.

Although it basically reported grim economic news, Mr. Jonathon Price explains something rather interesting: "There was a substantial improvement of the lending attitude diffusion index of medium and small businesses within the fourth quarter from positive-20 to positive-17."

This was before the adoption of negative interest rates in January, but Mr. Price considers this metric to be a good indicator of domestic demand, because according to him "small and medium enterprises comprise an essential part of every economy which includes real estate and construction. You can therefore use this metric to gauge economic growth."

Established in 2006, Nikko Holdings is an independent, full-service brokerage, wealth management and business management provider dedicated to providing wealth preservation solutions from Asia to Europe for affluent individuals, families and Institutions.

Corporate headquarters based in Tokyo, Japan, which are responsible for the oversight of more than $6.5 billion-worth of assets on behalf of esteemed clientele located in Europe, and Asia.

http://nikkoholdings.blogspot.com/