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Kuroda’s negative interest rates shock as BOJ heralds return to currency war

Bloomberg

The yen dropped the most in more than a year after Bank of Japan Gov. Haruhiko Kuroda unexpectedly adopted negative interest rates, risking another round of competitive devaluations.

The currency fell against all 16 of its major peers after the central bank voted 5-4 to apply an interest rate of minus 0.1 percent to current accounts held at the central bank. The surprise move prompted Morgan Stanley to remove its yen trading strategies for now, according to a research note from the bank.

The Bank of Japan’s decision halted a yen rally that threatened to be the strongest since Kuroda took office in 2013, and sent shock waves through currency markets. The move raises the specter of further easing by other central banks that also stand to benefit from weaker domestic currencies as they battle to stimulate growth and inflation. Officials in the euro area, Switzerland and Sweden have already lowered their deposit rates below zero, and the European Central Bank has promised to reconsider monetary policy again in March.

“The BOJ has rejoined the global currency war with a bang,” said Valentin Marinov, head of Group of 10 currency research at Credit Agricole SA’s corporate and investment banking unit in London. “The ECB may have to ease again in March, given that further upside correction in euro-yen will push the euro effective exchange rate above the levels that last year spurred the governing council into action.”

The yen slumped 2 percent to 121.14 per dollar as of 5 p.m. in New York, its biggest daily move since October 2014, and ended the month down 0.8 percent. It slid 0.9 percent to 131.21 per euro Friday, and declined 0.4 percent since Dec. 31.

The common currency slumped versus most of its peers, weakening 1 percent to $1.0831. It fell 0.3 percent in January.

ECB President Mario Draghi last week signaled he is ready to amp up stimulus in the euro area, saying policy makers will reconsider their stance in March after extending the bank’s quantitative-easing program in December.

“Draghi and the Bank of Japan will continue to act until they see better economic growth,” said Kate Warne, a St. Louis-based investment strategist at Edward D. Jones & Co. “For Europe and Japan, which are big exporters, part of that is a lower currency, but it’s really how do we get economic growth strong enough that we’re no longer worried that it’s just going to stay right around zero.”

Negative rates will push down borrowing costs and don’t preclude further bond purchases, Kuroda said at a news conference. The BOJ retained its target for an annual expansion of ¥80 trillion in the monetary base at this meeting.

Six of 42 economists surveyed predicted policy makers would expand already-record stimulus, with Citigroup Inc., JPMorgan Chase & Co. and UBS Group AG analysts among those giving additional stimulus at this meeting a more than 30 percent chance. None projected a move to negative rates. Kuroda said Jan. 21 the central bank was not considering negative rates.

The U.S. will also have to take note, according to John Vail, chief global strategist at Nikko Asset Management. The Federal Reserve kept its interest-rate target unchanged this week as policy makers monitor the economy. A report Friday showed economic growth cooled in the fourth quarter.

“There is some aspect of a challenge here on the currency front,” Vail said on Bloomberg Television. “We wouldn’t want the exchange rate to get too weak in Japan — I think 115 to 120 is sort of a tolerable rate” per dollar. “If it gets much weaker than that I think you’ll see Congress get quite upset and maybe even the administration.”