USD/JPY Breaks Key 110.00 Resistance - MUFG
Derek Halpenny, European Head of GMR at MUFG, suggests that the belief
was that USD/JPY might struggle for a period before being able to break
above the psychologically important 110.00 level but that break happened
with ease just prior to the start of London trading today.
“Fuelled by a Bloomberg story reporting from its source of “people familiar with talk at the BOJ” that the BOJ is considering a way to cut the interest rate paid on excess reserves into deeper negative territory. What looks like the BOJ taking a leaf from the ECB’s policy book, the BOJ is reportedly considering linking the interest rate paid through its ‘Stimulating Bank Lending Facility’ to the interest paid on current accounts to effectively pay banks who borrow these funds. This is something the ECB announced in March with four new TLTRO programs that can, depending on how much a bank lends, lead to the ECB paying banks for taking funds.
The details of the ‘Stimulating Bank Lending Facility’ outlined on the BOJ’s website shows the latest plan under this facility, effective 1st April 2014 charges an interest rate of zero percent on funds of duration of four years. The amount allowed under the facility is twice the volume of net lending of the bank relative to the net lending amount in Q1 2014.
Loans are disbursed on a quarterly basis with the view of “promoting banks aggressive action and helping increase proactive credit demand of firms and households”. There is no overall limit under the facility – so basically the more a bank lends, and the more it lifts its net lending, the more it can borrow at the next window. The total amount outstanding as of March is JPY 24,422bn with 129 borrowers currently participating in the program.
So certainly by linking the rate on this program to the interest rate paid on current accounts will at least eliminate the cost of holding these funds given the negative carry that currently exists and may therefore encourage the BOJ to go further with the negative interest rate ‘paid’ on current accounts.
Expectations until this morning in the market was for the BOJ to eschew a cut in the interest rate but to focus on increased asset buying of some form – now all options appear on the table. What will also be encouraging for the BOJ, if they are considering this step, is the fact that the Topix Bank Index jumped 4.8% today and the index has now recouped two-thirds of the loss suffered after the negative rate was introduced on 29th January.
It is also worth noting that for all the criticism of the BOJ’s policy move in January that reportedly ‘triggered’ a surge of the yen – a look at yields in Japan now does suggest the negative rate environment is having the desired impact of lowering the yield structure.
While the yen did surge, one could plausibly argue that the problem with the BOJ’s policy announcement on 29th January was more about timing than a flawed policy step. If that’s the thinking, finding ways to offset the negative impact for banks makes sense. What is clear now though is that expectations of BOJ action next week is very elevated and any disappointment would fuel a renewed surge of the yen.”