We seem to be entering a time when the official policy rates of major industrialized nations are converging on a range. That range is between zero and one percent. By historical standards, these levels are undoubtedly unprecedented. The United States, having recently gone "all in" by lowering the Federal Funds rate to a range between 0.00 and 0.25%, has laid down an example of dubious merit. First out of the chute is Japan. In its rate-setting exercise concluded earlier today, the BoJ slashed its policy rate from 0.30% to 0.10%, a twenty basis point cut. It seems to me like splitting hairs. It's not so much that rates need to be lowered so that borrowing is encouraged. Rather, lenders are so %^&£ scared to lend that you could probably make interest rates negative and these moves would not have the desired effect. That is, they'd rather conserve cash as various "assets" accumulated during the go-go era turn to mush.The recent pop of the euro suggests the markets believe the ECB will be the most reluctant to engage in this race to the bottom. Yes, everyone is cutting, but some are far more willing to cut than others.
For academic interest, the BoJ statement contains the following on the global conditions which have prompted this move:
Exports have been decreasing reflecting a slowdown in overseas economies, and domestic demand has become weaker against the background of the declining corporate profits and the worsening employment and income situation in the household sector. Financial conditions have deteriorated sharply on the whole. Under these circumstances, economic conditions have been deteriorating and are likely to increase in severity for the immediate future. Meanwhile, the CPI inflation rate (excluding fresh food), currently around 2 percent, is expected to moderate reflecting the declines in the prices of petroleum products and the stabilization of food prices. Looking further ahead, uncertainty in the outlook for the economy to return to a sustainable growth path with price stability has increased. Given the slowdown in overseas economies and the turmoil in global financial markets, it will likely take some time for the necessary conditions for Japan's economic recovery to be satisfied.As to the question of intervention, the BoJ did some "moral suasion" (attempting to move the market in the desired direction via official commentary) ahead of the rate-setting meeting. The FT has some relevant bits on when such intervention could be expected:
With regard to risk factors, much depends on financial conditions in the United States and Europe as well as developments in overseas economies, and attention will need to be paid to the further downside risks posed to economic activity. In addition, if financial conditions, as reflected in lending attitudes of financial institutions and issuing conditions in the corporate bond and CP markets, should increase in severity, pressures acting to depress economic activity from the financial side may become more marked. Turning to prices, there is a possibility that the inflation rate will decline further if downside risks to economic activity materialize or commodity prices fall further.
The Bank will continue to do its utmost as a central bank to facilitate the return of Japan's economy to a sustainable growth path with price stability. It strongly expects private financial institutions to respond appropriately by taking full advantage of low interest rates and various money market operation measures introduced.
In a marked sharpening of Tokyo’s language on the yen, senior government officials on Thursday highlighted the possibility of intervention to stem the Japanese currency’s rise against the dollar...Free market, we hardly knew ye.
Takeo Kawamura, the cabinet chief secretary, told a news conference that the government was closely watching the yen’s movements, saying: “We have conducted currency intervention in the past, and we will take appropriate measures, which include [intervention]...”
Talking about the possibility of what would be Tokyo’s first currency intervention since March 2004, Shoichi Nakagawa, finance minister, said: “I want to refrain from commenting on whether we’ll intervene or not, but there is that option.”
However, Akira Maekawa, senior economist at UBS Securities in Tokyo, said that at current yen levels, the government was unlikely to step into the market. “We think the authorities won’t intervene unless there is a huge move in a single day,” said Mr Maekawa, adding that officials were unlikely to announce any intervention in advance. “Maybe they are just trying to do verbal intervention to slow the appreciation.”
