Negative rates a ‘natural evolution’: Japan

In the USA, news that the economy barely grew in the final three months of 2015 prompted speculation that its central bank would rein in plans to raise interest rates this year, having tightened borrowing costs for the first time in nearly a decade in December.

The Dow Jones industrial index rose 280 points to 16,349 and the broader S&P index was up 32 points at mid-afternoon to 1,945.

The New Zealand dollar edged up to 91.39 Australian cents from 91.27 cents on Friday, gained to 45.45 British pence from 45.07 pence, and increased to 59.82 euro cents from 59.28 cents.

The Bank of Japan (BoJ) has now joined the European Central Bank in introducing negative interest rates, after cutting rates for some commercial banks holding money with it from 0.1% to -0.1%.

The rate will be cut “further into negative territory if judged as necessary”, the bank said in a statement following a two-day policy meeting that ended Friday.

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

“Local equities closed in the green, aided by an afternoon rally after the Bank of Japan [BoJ] surprised investors across the region with a negative interest rate policy”, Escartin said. Shares on Wall Street and in Europe rose around 2 percent, while MSCI’s all-country world stock index .MIWD00000PUS gained 1.73 percent.

The yield on benchmark 10-year Japanese government bonds JP10YTN=JBTC plunged to a record low of 0.09 percent, and the yen fell 2.32 percent to 121.57, on track for its biggest daily fall against the dollar in over a year.

A sharp braking of USA economic growth in the fourth quarter raised expectations that the Fed would go slow on future interest rate hikes, helping lift equity markets.

Chinese shares also rallied following the Japanese rate move but still suffered their biggest monthly fall for seven years.

The decision came to encourage more lending and business spending amid projections that the Japanese central bank will not achieve its two percent inflation goal as oil prices slide and a global economic downturn threatens to further impact spending, Xinhua reported.

The yield on the 10-year bond dropped 3 ½ basis points to 0.06 per cent as of 10:20am in Tokyo from Friday, according to Japan Bond Trading Co, the nation’s largest inter-dealer debt broker.

“In effect the BoJ is continuing with QE, but also adopting a system like that used in Switzerland where banks face a tiered interest rate which gets progressively worse as their deposits at the central bank rise”. “We were not expecting such a bold move from BOJ so the market is cheering their decision”, said Stephane Ekolo, chief European strategist at Market Securities in London.

US futures point to a gain at the open.