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Surprise! Bank of Japan Pushed the Key Interest Rate below Zero


Jan. 29 2016, Published 4:51 p.m. ET

Bank of Japan meeting

If you want to throw a surprise party, forget the party planners—call Bank of Japan chief Haruhiko Kuroda instead. In a move that surprised markets, on January 29, Japan’s central bank pushed the key interest rate into negative territory at -0.1%.

What this means is that starting February 16, 2016, the Bank of Japan will charge 0.1% interest rate on funds parked in the current accounts that financial institutions hold with the bank. Normally, a central bank pays for parking money with it. By making this move, the bank joins Switzerland, Sweden, and Denmark, which also have negative interest rates.

This may not be the lowest the rate can go in Japan. The central bank said that it will “cut the interest rate further into negative territory if judged as necessary.”

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A close call

The move was a contested one and was cleared by a 5–4 majority. This was surprising because at the World Economic Forum meeting in Davos earlier in the month, Kuroda noted that the central bank was not looking at negative interest rates for now. Japanese stocks jumped after the decision while the yen fell.

The move followed a weak consumer prices report which was released earlier on the same day. It showed that inflation in Japan rose 0.5% in 2015, way off the targeted 2% level. The Bank of Japan reduced its forecast for core inflation to crawl at 0.8% in the upcoming fiscal year, down from the 1.4% forecast for the same period a quarter ago.

Abenomics 2.0

In September 2015, Shinzo Abe, the prime minister of Japan, announced what he called the second stage of his economic policies termed as Abenomics. The second stage continued with a three-pronged plan, with the new goals being:

  • increasing Japan’s GDP to 600 trillion yen (~$5 trillion)
  • supporting the raising of children by targeting women’s fertility rate of 1.8
  • improving social security by focusing on care for the elderly

Generally, a policy is said to have entered its second phase when the first has been successfully completed. However, for Japan, it does not seem to be the case. The Japanese economy has yet to gain traction, inflation continues to stay well below the ~2% target due to depressed energy prices (TOT) (RDS.B) (XOM), and structural reforms have not yet been completed.

There is some debate out there regarding the effectiveness of Japan’s monetary policy and stimulus measures. Given this background, it seems as if three new objectives have been created as the earlier three were not delivering results in the timeframe set for them.

Can this be called a failure of Abenomics? Not necessarily. For now, it seems that version 2.0 was released due to a delay in achieving the objectives of the first set of Abenomics goals.

What does this mean for mutual fund investors?

The fuzzy economic picture did not have much impact on the Japanese stocks market, which was among the best-performing markets in 2015. As can be seen from the above graph, Japan-focused mutual funds (NTJAX) (SAESX) had a great 2015.

In this series, we aim to break down the portfolio holdings of six of the nine Japan-focused mutual funds whose performance is displayed in the chart. We’ll analyze the six biggest funds by asset size for their composition and what contributed to their performance. In the final part of the series, we’ll draw up a composite picture for all who are either invested or are thinking about investing in Japan via the mutual fund route.

We’ll begin our analysis with the Brown Advisory WMC Japan Alpha Opportunities Fund (BIAJX).


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