Newspaper article International New York Times

Japan Bonds Go Negative, Following Interest Rates ; Stronger Yen Drags Stocks Down 5%, Foiling Central Bank's Stimulus Measures

Newspaper article International New York Times

Japan Bonds Go Negative, Following Interest Rates ; Stronger Yen Drags Stocks Down 5%, Foiling Central Bank's Stimulus Measures

Article excerpt

Investors react to a recent surprise rate decision by the central bank, and stocks fall sharply as the yen gathers strength.

Given Japan's outsize public debt, holding an i.o.u. from its government might seem like a risky proposition that would require the promise of a substantial reward.

But this week, as global economic fears drove money into safer assets, investors in Japanese debt began essentially performing that service for free.

On Tuesday, the yield on Japanese 10-year bonds, the benchmark of government borrowing, dropped to zero for the first time. They quickly fell into negative territory, meaning some investors were buying bonds despite knowing that if they held them until maturity, they would come away with less money than they paid.

And on top of that, a strong yen dragged Japanese stocks down more than 5 percent in the worst trading day this year.

The reversal of bond-investor logic flows from the introduction of negative interest rates by the central bank, the Bank of Japan, experts say. The bank's governor, Haruhiko Kuroda, surprised markets on Jan. 29 by announcing that it would start charging private- sector lenders a penalty of 0.1 percent to hold onto their excess cash, or reserves.

The move was intended to bolster the Japanese economy, but the flight by global investors to perceived safe assets is complicating the effort.

Like savers depositing money at a local bank, banks keep their own unused cash at the central bank. The interest they earn on those reserves -- or do not earn, as the case may be -- helps determine the cost of other kinds of borrowing and lending.

The Bank of Japan's new policy is intended to stimulate the economy, which narrowly avoided falling into recession last quarter. By making it unprofitable for banks to hold cash, Mr. Kuroda hopes to encourage them to lend more freely and get businesses and households to spend. He also wants to give a lift to consumer prices, which have been sagging after a welcome but short-lived bout of inflation.

In other countries that have introduced negative interest rates, like Sweden and Switzerland, government bond yields have also been pushed below zero. …

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