QE in Japan Nears End: Daiwa Capital Markets, by Wolf Richter

A good summary of the Bank of Japan’s move to negative interest rates, which propelled the Dow up nearly 400 points Friday, with apt conclusions drawn. From Wolf Richter at wolfstreet.com:

The Bank of Japan’s desperate head fake.

The US stock market was a coiled spring. Stocks had been pushed down relentlessly. Short interest was huge. We’d been expecting a big rally. It just didn’t materialize for longer than a day or two. But on Friday, that coiled spring was released, and stocks bounced nearly 2.5%, to produce the worst January since 2009.

The market had received a couple of central-bank signals that it interpreted as “more free money.” That’s the only thing markets care about anymore.

One of those signals came from the Bank of Japan. As the economy has deteriorated recently, despite years of QE and a near-eternal zero-interest-rate policy, the BoJ decided to cut one of its deposit rates from +0.1% to -0.1%. Headlines screamed Japan had gone “negative,” that it had joined the NIRPs of Europe.

It was a head fake.

It revealed a desperate out-of-options central bank whose scorched-earth monetary policies have led nowhere. And it was a surprise. This is how Daiwa Capital Markets Europe, a subsidiary of Daiwa Securities Group in Japan, explained the phenomenon:

Every time we’ve heard from BoJ officials over the past couple of years there has been one consistent message – imposing a negative interest rate on excess reserves was not on the agenda, not least since it could work against its asset purchase program. And as recently as last week, Kuroda was brazenly asserting that the BoJ was not seriously considering a cut in the interest rate paid on excess reserves.

A year ago, it was the Swiss National Bank that roiled markets when it did what it had vowed it wouldn’t do: abandon the cap on the franc. The franc soared, stocks plunged, currency traders went over the cliff, and everyone learned that central banks, despite their promises, might ruin you.

On Friday, it was the BoJ that pulled that trick. For heightened impact, it rebranded its new promise of wealth creation or whatever as “QQE with a Negative Interest Rate.”

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