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Thursday, January 28, 2016

BOJ adopts negative rates in ramped-up stimulus campaign, stuns markets: competitive devaluation

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(Earth is rising over the Moon's Surface), Source: ========================= News Analysis: BOJ's surprising steps stopgap antidote to domestic woes, may spark broader devaluations Source: Xinhua 2016-01-30 14:45:04 by Liu Tian, Xu Yuan TOKYO, Jan. 30 (Xinhua) -- The Bank of Japan (BOJ) on Friday surprised markets by announcing that it would introduce a negative interest rate to show resolution in the fight against prolonged deflation. The proposed remedy, however, may hold few substantial cures for Japanese economic structural woes and may trigger other currencies' competitive devaluation, which would ultimately send stocks lower here and inhibit capital expenditure, the exact opposite of the central's ultimate reflationary goal. Japan's top central banker Haruhiko Kuroda told a press conference on Friday that "by adding an option for easing from the perspective of interest rates, we will make full use of easing measures with three dimensions, quantity, quality and interest rates." Although the BOJ chief was reluctant to follow suit when the European Central Bank plunged into negative interest rates, he hoped that Friday's "shock move" will suddenly motivate lending and thus spending, so as to actualize policy effects at the earliest possible juncture. The central bank planned to introduce the minus interest rate from next month and said it will further cut the interest rate if necessary. By doing so, the bank is hedging that commercial banks will be further incentivized to lend to businesses to promote widespread investment and growth, and put the bank back on track to hit its 2-percent inflation target, although the timeframe for this has once again been pushed back. But the danger of this gamble is that the BOJ has no means to ensure that the funds flowing out from commercial banks will be successfully injected into the real economy. If not, the market will soon erase surging gains made after the surprise announcement and return to a protracted spell of retreat into territory. This, more so if a "deflationary mindset" continues in businesses and households here, and other countries' currencies are forced lower and the yen used as a safe haven, which drives stocks lower, pummels Japan's export sector, which in turn impacts production and ensures businesses keep their purse strings tighter. Furthermore, the policy, to some extent, exposed the fact that the BOJ's previous monetary easing measures have failed to help bolster the banks reflationary efforts, while the meager rise in the consumer prices index in 2015 and the delayed timeframe of achieving the inflation goal, has proved that the country may possibly reenter its well-known deflationary quagmire. The BOJ, in terms of its monetary base, decided in the meantime to continue to increase the base at an annual pace of 80 trillion yen (around 674.48 billion U.S. dollars) through aggressive purchases of government bonds. But analysts here pointed out that the introduction of the negative interest rate showed that the BOJ's capability to purchase government bonds has reached its limit since commercial banks here will be reluctant to deposit cash in the BOJ and make it more difficult to continue such purchases. The BOJ's dramatic move temporarily halted the Japanese yen's appreciation and forced its devaluation, with the currency's fast retreating from the 118-yen level to the 121-yen zone versus its U.S. counterpart, after the BOJ's latest easing measures were announced Friday. However, a constantly depreciated yen will finally damage assets held by common Japanese people. Meanwhile, another issue of the minus interest rate that needs to be focused on, involves recent policy moves by the U.S. Federal Reserve raising its key interest rate and the European Central Bank hinting it will further ease its policy this spring. The BOJ's move triggering the yen's retreat will exert more pressure on other central banks to also ease their currencies and the result could end up severely hampering the tepid recovery of both regional and global economies. Related: BOJ to introduce negative interest rates, delays inflation target amid oil price slump TOKYO, Jan. 29 (Xinhua) -- The Bank of Japan (BOJ) on Friday following the conclusion of a two-day policy board meeting said it would introduce negative interest rates from next month to encourage more lending and business spending amid projections the central bank will not clear its 2 percent inflation goal, as oil prices' slide and a global economic downturn threatens to further impact spending. The BOJ surprised markets here, with economists widely believing further easing measures announced Friday would be negligible if at all, by saying it plans to introduce a negative interest rate from Feb. 16, as falling oil prices have hampered the bank's reflationary efforts, with the shock move aimed at proactively defending against global economic malaise denting business sentiment here.Full story Bank of Japan further eases monetary policy TOKYO, Jan. 29 (Xinhua) -- The Bank of Japan (BOJ) on Friday said it would implement new monetary easing measures amid projections the central bank will not clear its 2 percent inflation goal. While delaying the timing of its 2 percent inflation goal, the central bank also cuts its inflation target for fiscal year 2016, stating it now expects CPI to increase 0.8 percent. Full story =============================================== ------------------------ DEFINITION of 'Negative Interest Rate Policy (NIRP)' A negative interest rate policy (NIRP) is an unconventional monetary policy tool whereby nominal target interest rates are set with a negative value, below the theoretical lower bound of zero percent. BREAKING DOWN 'Negative Interest Rate Policy (NIRP)' During deflationary periods, people and businesses hoard money (A supply or store of something held or hidden for future use.) instead of spending and investing. The result is a collapse in aggregate demand which leads to prices falling even farther, a slowdown or halt in real production and output, and an increase in unemployment. A loose or expansionary monetary policy is usually employed to deal with such economic stagnation. However, if deflationary forces are strong enough, simply cutting the central bank's interest rate to zero may not be sufficient to stimulate borrowing and lending. A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe. Examples An example of a negative interest rate policy would be to set the key rate at – 0.2%, such that bank depositors would have to pay two-tenths of a percent on their deposits instead of receiving any sort of positive interest. The Swiss government ran a de facto negative interest rate regime in the early 1970s to counter its currency appreciation due to investors fleeing inflation in other parts of the world. In 2009 and 2010 Sweden and in 2012 Denmark used negative interest rates to stem hot money flows into their economies. In 2014 the European Central Bank (ECB) instituted a negative interest rate that only applied to bank deposits intended to prevent the Eurozone from falling into a deflationary spiral. Theoretically, targeting interest rates below zero will reduce the costs to borrow for companies and households, driving demand for loans and incentivizing investment and consumer spending. Retail banks may choose to internalize the costs associated with negative interest rates by paying them, which will negatively impact profits, rather than passing the costs to small depositors for fear that otherwise they will move their deposits into cash. Though fears that bank customers and banks would move all their money holdings into cash (or M1) did not materialize, there is some evidence to suggest that negative interest rates in Europe cut down interbank loans. Read more: Negative Interest Rate Policy (NIRP) Definition | Investopedia Follow us: Investopedia on Facebook --------- Macroeconomics - The Consumer Price Index & Inflation Inflation Inflation is defined as an increase in the overall price level. Please note that inflation does not apply to the price level of just one good, but rather to how prices are doing overall. A consumer facing inflation that occurs at the rate of 10% per year will able to buy 10% less goods at the end of the year if his or her income stays the same. Inflation can also be defined as a decline in the real purchasing power of the applicable currency. Consumer Price Index (CPI) The CPI represents prices paid by consumers (or households). Prices for a basket of goods are compiled for a certain base period. Price data for the same basket of goods is then collected on a monthly basis. This data is used to compare the prices for a particular month with the prices from a different time period. Example: The inflation rate is computed by subtracting the CPI of last year's prices from the CPI value for this year, dividing that difference by last year's CPI value and then multiplying by 100. So if the value of the price index for the current year is equal to 165, and last year's value was 150, the rate would be calculated as: Inflation rate = (165 - 150)/150 X100= 10 CPI Sources of Bias The CPI is not a perfect measure of inflation. Sources of bias include: ·Quality adjustments - quality of many goods (e.g., cars, computers, and televisions) goes up every year. Although the Bureau of Labor Statistics is now making adjustments for quality improvements, some price increases may reflect quality adjustments that are still counted entirely as inflation. ·New goods - new goods may be introduced that will be hard to compare to older substitutes. ·Substitution - if the price goes up for one good, consumers may substitute another good that provides similar utility. A common example is beef vs. pork. If the price goes up, and the price of pork stays the same, consumers might easily switch to pork. Although the CPI will go higher due to the price increase in beef, many consumers may not be worse off. Also, when prices go up, consumers may effectively not pay the higher prices by switching to discount stores. The CPI surveys do not check to see if consumers are substituting discount or outlet stores. Read more: The Consumer Price Index & Inflation - CFA Level 1 | Investopedia Follow us: Investopedia on Facebook ---------------------------------------- Thu Jan 28, 2016 11:59pm EST Related: Japan TOKYO | By Leika Kihara A line of waiting customers are reflected in a window as an employee counts money at the Bank of Tokyo-Mitsubishi UFJ foreign currency exchange in Tokyo October 10, 2008. Reuters/Yuriko Nakao The Bank of Japan ramped up its aggressive stimulus campaign on Friday, adding negative interest rates on central bank deposits to its massive asset-buying program, stunning financial markets that expected no action or a moderate increase in asset purchases. The central bank said the move was aimed at forestalling the risk of global financial turbulence hurting business confidence and reviving the "deflationary mindset" it is striving to wipe out with aggressive money printing. Asian shares jumped and the yen fell across the board and sovereign bonds rallied after the BOJ said it would charge banks for excess reserves parked with the institution, an aggressive policy pioneered by the European Central Bank. The BOJ maintained its pledge to expand base money at an annual pace of 80 trillion yen ($675 billion) via aggressive purchases of government bonds and risky assets conducted under its quantitative and qualitative easing (QQE) program. But in a narrow 5-4 vote, it also decided to charge a 0.1 percent interest to current accounts that financial institutions hold with the central bank. "The BOJ will cut the interest rate further into negative territory if judged as necessary," the bank said in a statement announcing the decision. Markets have been split on whether the 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. In a quarterly review of its forecasts released on Friday, the BOJ cut its core consumer inflation forecast for the coming fiscal year beginning in April to 0.8 percent from 1.4 percent projected three months ago. However, it expects consumer inflation to accelerate to 1.8 percent in the fiscal year ending in March 2018, taking into account the effect of Friday's measures. The decision came in the wake of data that showed household spending and output slumped in December, underscoring the fragile nature of Japan's recovery. Consumer inflation was just 0.1 percent in the year to December, invigorating expectations that the BOJ would eventually have to deliver further stimulus. Many BOJ policymakers have been wary of using their diminishing policy tools to counter what they see as factors beyond their control, such as volatile financial markets and China's economic slowdown. But pessimists on the BOJ board have worried that slumping Tokyo stocks may discourage firms from boosting capital expenditure, threatening the positive momentum the BOJ is trying to create with its heavy money printing. (Story refiles to correct spelling of bank in opening paragraph) (Reporting by Leika Kihara; Editing by Eric Meijer) =========================== MEDIA RELEASE 5/2016 27 January 2016 Embargo: 11.30 am (Canberra time) CPI December quarter 2015 rises 0.4 per cent The latest Australian Bureau of Statistics (ABS) figures show the Consumer Price Index (CPI) rose 0.4 per cent in the December quarter 2015, following a rise of 0.5 per cent in the September quarter 2015. The most significant price rises this quarter were in tobacco (+7.4 per cent), domestic holiday travel and accommodation (+5.9 per cent) and international holiday travel and accommodation (+2.4 per cent). These rises were partially offset by falls in automotive fuel (–5.7 per cent), telecommunication equipment and services (–2.4 per cent) and fruit (–2.6 per cent). The increase of 0.1 per cent for the housing group is the weakest movement since March quarter 1998 as price rises for rents (+0.2 per cent) and new dwelling purchase by owner occupiers (+0.1 per cent) have been subdued through the quarter. The 0.1 per cent rise for new dwellings purchase by owner occupiers is the weakest movement since March quarter 2014. The CPI rose 1.7 per cent through the year to the December quarter 2015, following a rise of 1.5 per cent through the year to the September quarter 2015. Further information is available in Consumer Price Index, Australia (cat. no. 6401.0) available from the ABS website: Media note: When reporting ABS data you must attribute the Australian Bureau of Statistics (or the ABS) as the source. Media requests and interviews - contact the ABS Communications Section on 1300 175 070. This issue incorporates a feature article titled "Australian Dietary Guidelines Price Indexes". The article is available in Consumer Price Index, Australia (cat. no. 6401.0) available from the ABS website: ================== The Federal Reserve started raising official interest rates in December. But in the stress tests that large U.S. banks have to undergo, the central bank is hypothesizing that short-term Treasury yields could drop below zero. The European Central Bank and, since Friday, the Bank of Japan are trying it with policy benchmarks. Though negative U.S. interest rates are for now only in the Fed’s worst-case scenario, they are becoming a plausible downturn assumption.

The stress tests are required each year under the Dodd-Frank Act, and the 2016 parameters for big financial institutions were announced last week. They come in “baseline,” “adverse” and “severely adverse” flavors. The last is supposed to represent a severe global recession, and that’s where the Fed has told banks to model negative yields on short-term Treasury securities – emphasizing that it’s a hypothetical scenario, not a forecast.

Yet it’s no longer looking outlandish. There’s plenty for now to keep the Fed on a gradual path toward higher rates, including healthy U.S. employment and relatively steady growth. Even the uninspiring first estimate for GDP last quarter, which indicated a 0.7 percent annualized pace, still showed year-on-year expansion of 1.8 percent.

There are deepening wrinkles, though. Global market volatility should matter to the Fed only to the extent it reflects or causes real economic trouble, but the flickering of screens in real time may loom larger than that psychologically. Another concern is that actions like Japan’s decision to set a negative rate add to the reasons for the dollar to strengthen, potentially making U.S. exporters less competitive.

Either way, another downturn will eventually come to the United States, and the option of going negative may appeal to the Fed on policy grounds, whether or not Treasury yields are below zero. If Chair Janet Yellen and her colleagues haven’t managed to raise rates much by then, there may not be much juice in cutting official rates only to zero.

Yellen in November told a House of Representatives committee that if the economy took a turn for the worse, “potentially anything – including negative interest rates – would be on the table.” If the ECB, the BOJ and others have shown by then that charging depositors is even marginally effective, negative rates could shift from the severely adverse scenario into the Fed’s regular toolkit.

The U.S. Federal Reserve on Jan. 28 published the scenarios for annual so-called stress tests required of large U.S. banks under the Dodd-Frank Act.

In the Fed’s Comprehensive Capital Analysis and Review scenarios, the worst of the three cases, dubbed “severely adverse,” represents a severe global recession, corporate financial stress and negative yields for short-term Treasury securities.

The Bank of Japan unexpectedly cut a benchmark interest rate below zero on Jan. 29, surprising investors with another bold move to stimulate the economy.

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