When I start to write an article in the weekend, I try to choose the event more important of the week and then I start the article writing about that. If the week had ended yesterday I would have been confused on the main event, the one that shakes stock markets, hence.
Fortunately, it was the last day of the week, which has always been the least eventful, to bring the event that helped me to write this article.
The Bank of Japan cut the interest rate, bringing it in the negative area to -0.1%, for the first time in history. The aim was to stimulate the real economy to the detriment of deposits. The new interest rates will be applied from February 16th.
This move did devalue the yen in all the changes. We have seen an impressive surge in the major dollar-yen (USD/JPY), which over the week has pushed up the prices of 226 pips. We have seen also impressive effects on the cross: EUR/JPY that rose of 287 pips and GBP/JPY that registered +288 pips.
With the interest rate at this level, the central bank of Japan (BoJ) decided also to delay the timing for reaching the 2 percent inflation target to first half of 2017 fiscal year and to create a three-tier system for current accounts; tiers include positive, zero and negative rates.
Despite this, the Bank of Japan chose to leave the annual rise in the monetary base unchanged at ¥80 trillion.
the news was certainly a shock to investors who had eliminated just two weeks ago the possibility of a negative interest rate thanks to the comments of the top of the BOJ itself, Mr. Haruhiko Kuroda. But apparently it was just a big threat.
In the past few weeks we have seen the yen acting as a safe haven for those who no longer believed in the true safe haven assets (gold and silver) and for those unwilling to have anything to do with risky currencies (aka Yuan). Investors had confidence on Japan even if they knew better that its rates were next to zero.
By the way, all this was swept away by the decision of the BOJ and Yen actually costs money.
Negative rate-regimes have been avoided for so long because it could be potentially playing with destroying. We are talking about inflation, not the kind one. Let’s ask what Russia thinks about it.
What matters now is if this decision will have the desired effects. There are not so many countries to use as an example that adopted this system, but we do not know if the result will be the same. Will it catastrophic like Europe? Or Denmark? We cannot make a comparison because these countries are different from Japan under various points of view.
What we really know now is that will be an experiment with consequences. Whether good or bad, we will see very soon. What we would like to suggest you at the moment is to avoid long yen and be cautious with short because there is still China that could knock on the door at any moment.