Mar 18, 2016

Understanding The Bank of Japan's Negative Interest Rate Strategy

In this video blog Dan Li, SVP and Global Head of Financial Engineering of Numerix speaks with CMO, Jim Jockle about the Bank of Japan's recent announcement to move interest rates into negative territory. Dan provides his perspective on the BOJ's latest monetary policy shake-up including the details of the plan, the impact on Japanese financial institutions and the reasons behind the decision. He also discusses how what's happening in Japan compares to the ongoing negative rate environment across parts of the Eurozone and Nordics.

(Japanese translation below English)

Jim: Hi welcome to the Numerix video blog I’m your host Jim Jockle. The bank of Japan announced in January and enacted in February negative interest rates for all of its banks; joining the Eurozone as well as the Nordics in terms of utilizing this new tool to stimulate the economy. Joining me today is Dan Li, SVP of the Global Financial Engineering Group here at Numerix to dive into this a little bit more. Welcome Dan.

ようこそニューメリックスのビデオブログヘ。司会を務めるジム・ジョックルです。日本銀行は1月にマイナス金利政策を発表し、2月から全ての銀行に適用しました。今日のゲストはダン・リーです。彼は弊社のグローバル ファイナンシャル エンジニア グループのSVPです。ようこそ、ダン。

Dan: Hi Jim, how are you? And thanks for having me.


Jim: What are the implications of this negative rate announcement for banks in Japan?


Dan: Well this was certainly an unexpected event. The Bank of Japan announced it was cutting key interest rates to negative marking the first time this has happened in an Asian country. Japan has kept its rates near zero for decades and now they are trying to boost their economy and combat inflation; from my perspective they are testing the waters. What they did was take a structured approach. Meaning the negative interest rate is applied on excess reserves, while the required reserve would stay at a zero interest rate. Also, all existing reserves would stay positive – 10 bps which is 0.1%. The negative rate now is still really close to zero – but still negative at 0.1%, which is 10 bps below zero.


Jim: How does what’s happening in Japan compare to what’s going on in some of the European countries?


Dan: A similar structure and approach to negative rates has occurred in Switzerland, but for other countries such as those under the ECB – what they’ve done is more or less flat, a single negative rate. There are pros and cons but the goal is for these central banks to encourage banks to invest instead of putting money into the excess reserves, thus a drive to invest in alternative assets. This could have bigger effects to the global economy – like increasing the price of those alternative assets or pushing yields lower. You can already see, including in recent Japan, many negative bond yields – like the Japan 10 year Treasury bond.


Jim: Now we’re seeing rates going more and more negative and it’s not a temporary situation any longer. Are central banks running out of tools? How are the markets starting to think about this?


Dan: When you try to lower the interest rate you can control the overnight rate for borrowing to encourage financial institutions. However this can have a contingent effect on the derivative market – impacting not only the OIS rate, but also 1 month, 1 year, 2 year up to 5 or 7 year you can see the negative rates. This contingent effect would also move to the Libor curve where we can see the negative Libor rates. From a central bank perspective their goal is to boost the economy. They don’t want banks to have their money sit there for an opportunity cost. They would like them to invest. Today, the entire global economy returns are low, essentially central banks don’t have many monetary tools they can play with, therefore only to cross that zero boundary.

金利を低めに誘導しようとすれば、オーバーナイトの金利をコントロールし、金融機関にお金を借りさせようとします。しかし、この政策はデリバティブマーケットに副作用をもたらします。OISばかりでなく1ヶ月、1年、2年、から5年7年辺りまでマイナス金利が観測されています。この偶発的な影響はLIBORカーブにもおよび、ネガティブLIBORも観測されています。中央銀行としては、彼らのゴールは景気浮揚です。彼らは、銀行にわずかな付利のためお金を準備口座に置かせたくないのです。 銀行に投資させたいのです。現在世界経済のリターンは低く根本的に中央銀行が使える金融政策の幅は広くありません。したがってゼロという境界を越えるしかないのです。

Jim: Well Dan, I want to thank you so much for your positive outlook on this negative issue. And of course on the Numerix video blog we want to talk about all the things you want to talk about so feel free to follow up on LinkedIn or on Twitter @nxanalytics we’d love to hear from you and continue this conversation. Dan thank you so much.

ダン。マイナス金利について有用な話を聞けてよかったです。Numkerix ビデオブログでは皆さんが聞きたいことを話す場にしたいので、LinkedInやツイッター@nxanalyticsをフォローして下さい。皆さんの意見をお待ちしてます。ダン、どうも有難う。

Dan: Thanks.


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