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Friday, the Bank of Japan shocked markets by announcing it would charge financial institutions 0.1% of their balances in certain current accounts, essentially imposing a negative interest rate.
Previously, the central bank paid 0.1% on those accounts.
Stocks around the world rallied on the news. Why? “Japan’s central bank basically did nothing, but did it in a way that looks like it’s willing to do something in the future,” Matt O’Brien explained in the Washington Post’s Wonkblog. “In other words, it’s about the message it sends—that they haven’t given up and are willing to try new things—more than anything else.” He likened the move to a “Jedi mind trick.”
The Jedi mind trick worked “a long time ago in a galaxy far, far away,” and on Friday, on our planet, the BOJ’s announcement had a similar effect, not only lifting equity prices but also, to the delight of Japanese technocrats, depressing the yen against the dollar.
Jesper Koll of WisdomTree Japan explained the warm market reception. “It really is a very, very strong signal,” he told Voice of America’s Steve Herman. “It is a penalty for the banks to just lazily give their money to the central bank rather than investing it in the real world.”
Japan’s bankers have many well-known sins, but being lazy is not one of them. Yes, they’re not lending, but it is not because they are sloths. They’re not lending because there’s little demand for money.
For years, successive Japanese governments have tried to compensate for falling consumer demand with public works, concreting most every river in Japan and connecting isolated islands with suspension bridges. They financed the wasteful projects by issuing more and more government bonds, JGBs. The imposition of negative interest rates is, as Koll noted, a signal, but not of the good kind. As Daiju Aoki of UBS Securities in Tokyo told Reuters about the central bank’s decision, “This shows that the ability to buy more JGBs is limited.”
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