BOJ reportedly sees no backlash in markets if rate cut becomes necessary

Author: Justin Low | Category: Central Banks

Bloomberg reports, citing people familiar with the matter

The report says that BOJ officials think that lowering interest rates further into negative territory, if they choose to do so in the coming months, wouldn't backfire in financial markets because investors are aware of such a possibility.

Adding that the BOJ is also increasingly confident that commercial banks are strong enough to cope with a lower negative rate and don't see the pain becoming overly disruptive to Japan's overall financial system.

I think this needs to be put into context a little. Back in January 2016, the BOJ sort of blindsided markets by introducing negative rates when their previous communication was that they weren't looking into such an option (even just days before).

Markets took it poorly and raised doubts about the BOJ policy, with the yen ended up strengthening over the next few months and the central bank faced a bit of scrutiny from the public in general.

Their fear is that a further rate cut now will precipitate a similar reaction with the BOJ is seemingly running out of options at this point.

I reckon it could very well provoke a similar but less profound response. But with how macro trends are developing in markets, it could just be what triggers renewed momentum in yen strength in due time.

Think of it this way:

If you have an overwhelming urge to break the rules (bid up the yen), what exactly is stopping you? The impending punishment (BOJ intervention/stimulus) of course. However, if said punishment isn't as impactful as the threat of the punishment itself, then you're just going to go ahead and break the rules anyhow.
An additional rate cut - likely a small one - will hardly have a lasting impact to bolster economic confidence and inflation expectations so I don't think it really matters but they have no other choice but to do so to keep up with the rest of the world in a race to the bottom.

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