18 January 2020
Haruhiko Kuroda has stressed stability in the yen exchange rate. Photo: Reuters
Haruhiko Kuroda has stressed stability in the yen exchange rate. Photo: Reuters

Monetary policy efficiency at a critical point

The Japanese central bank surprised the market last week by setting a negative interest rate.

The move has generated concern about a sustained devaluation of yen.

However, a closer look at the decision and the speech given by Bank of Japan governor Haruhiko Kuroda will tell you it’s not a good idea to bet on a weaker yen.

Central banks, including the Japanese one, have been depreciating their currencies against the US dollar to promote economic growth.

But Kuroda has stressed stability in the yen exchange rate.

The BoJ is not necessarily expecting a large devaluation of the yen.

Moreover, he has been using monetary easing policies aggressively.

He could have accelerated the growth of the monetary base, but he didn’t.

The new negative-interest-rate policy in Japan operates through a three-tier system, which means the negative interest rate applies to only part of the deposits financial institutions hold with the BoJ.

The decision was passed by five votes to four, so it is too early to say the policy will be extended.

I think the BoJ’s decision is reasonable given the great likelihood of the US Federal Reserve refraining from raising interest rates next month.

No matter whether the BoJ injects liquidity by buying more treasury bonds or reduces the interest rate to below zero, smart money will not flow into the real economy again owing to the deflation environment.

And an expanded easing policy may only cause larger financial asset bubbles.

The Japanese yen will not be the main currency to short or to arbitrage this year, but the renminbi will.

Following its devaluation in December, the renminbi further weakened last month.

The spread between the onshore and offshore renminbi expanded at one point to a historical high of 1,600 basis points.

The exchange rate fell as far as to 6.761 against the US dollar on Jan. 7.

Although it is stabilizing, I believe there’s little room for the renminbi to strengthen.

The global markets and mainland residents hold a pessimistic attitude toward the mainland’s economy and its financial markets.

Nobody knows when the downtrend will end given a weakening renminbi.

This article appeared in the Hong Kong Economic Journal on Feb. 4.

Translation by Myssie You

[Chinese version 中文版]

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head of private banking and trust services at Hang Seng Bank