The Bank of Japan’s surprise decision to introduce a negative interest rate on the top tier of banks’ reserve holdings recalls the famous Beyond the Fringe sketch in which Peter Cook’s squadron leader character calls for a futile gesture to raise the tone of the war. The move is very unlikely to have any positive impact on the economy and will probably also fail in its main aim of weakening the yen.

When the BoJ ramped up its bond-buying as part of its quantitative and qualitative easing (QQE) programme introduced in April 2013, posts here expressed scepticism about the effects on domestic monetary trends and the economy. Specifically, the first-round boost to the money supply from extra QE was expected to be offset by increased bond sales by banks and capital outflows, while any second-round stimulus to bank lending seemed likely to be small. So it has proved: annual M3 growth of 2.4% in December compares with 2.5% when QQE was launched.

Today’s move will push short-term market rates further into negative territory but is even less likely to shift the monetary or economic dials. QE, at least, has a positive first-round monetary impact, even if the final pass-through is minimal. The hope / fantasy seems to be that negative rates will prompt banks to ease lending terms, calling forth stronger credit demand. More likely, banks and borrowers will interpret the move as a negative signal for economic prospects and evidence of BoJ desperation, causing them to be more rather than less risk-averse.

Governor Kuroda’s principal goal, of course, was to restore the yen to a weakening trend – days after recommending that the Chinese authorities tighten capital controls to maintain RMB stability! The problem for him and ECB President Draghi is that markets now perceive them to be running out of ammunition; their easing initiatives, therefore, mainly serve to underline the fragility of the global economy, leading to a larger downward revision in US than domestic interest rate expectations*. With US monetary trends suggesting continued economic weakness, BoJ / ECB depreciation efforts may struggle to gain traction.

*Two-year government yields have fallen by 25, 13 and 7 basis points respectively in the US, Germany and Japan since the start of 2016, according to Bloomberg.