Japanese central bank introduces negative interest rates

The Bank of Japan’s big Friday surprise had investors in Tokyo in a frenzy as they tried to make sense of the new negative interest rate policy.

Equities surged globally, the yen tumbled and sovereign debt rallied after the BOJ said it would charge 0.1 percent for excess reserves and may cut rates further if necessary, an aggressive policy pioneered by the European Central Bank.

Most investors had believed Japan’s policymakers were too cautious to ever adopt such a radical measure.

Exporters, on the other hand, were mostly up as the dollar-yen pair traded higher at 121.31.

The BOJ last week chose to keep the policy rate at the negative territory for the first time in its history. Japan’s benchmark Nikkei 225 stock index, which had been down about 0.8 percent at midday, shot higher. Shares on Wall Street and in Europe rose around 2 percent, while MSCI’s all-country world stock index gained 1.73 percent.

US government securities have returned 1.8 percent this month, rallying for the third January in a row.

Markets clearly expect ECB President Mario Draghi to act again when the central bank next meets in March.

The most active gold contract for April delivery edged up 0.3 dollar, or 0.03 percent, to settle at 1,116.40 dollars per ounce. In Germany, the five-year note yield reached a record low of minus 0.298 percent.

The dollar was up 0.6 percent against a basket of currencies at 99.174, though still down slightly on the week.

“While that wouldn’t be a complete solution to fall in oil prices and concerns about slowdown in China, it will ease excessive reactions in markets”, he said.

The U.S. real GDP increased at an annual rate of 0.7 percent in the fourth quarter of 2015, according to the advance estimate released by the Commerce Department Friday. That put oil on track for a second weekly gain, though volatility has climbed to its highest since 2009 as traders try to price in the uncertainty around supply cuts.

“However, today’s move also follows a hard period for Japan which has seen some weak activity indicators and the yen rise significantly over the past month, thus diminishing the prospects for hitting its 2% inflation target”.

The Australian dollar, often used as a proxy of China-related trades, was down 0.2 per cent at $0.7071.

Indeed, the U.S. Federal Reserve kept interest rates unchanged after a two-day policy meeting Wednesday and said it was “closely monitoring” global economic and financial developments.

Fed fund futures 0#FF: rose to imply a rate of 51 basis points by year end, compared with 90 basis points a month ago. US futures point to a gain at the open.