Global Briefing: Rates Nearing Zero in Japan

The Bank of England sits tight amid speculation that European bankers are bailing out the euro.
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As the market awaits Friday's U.S. employment report, two developments will vie for attention. First, the Bank of Japan has driven overnight interest rates near zero. Second, there is increased talk that one or more European central bank may have intervened to stem the euro's slide.

Insight into Japanese monetary policy can be gleaned by closely watching the BOJ's open-market operations. In recent days, as this space has been recording, the BOJ has been leaving large surpluses in the banking system. Earlier today the BOJ injected 400 billion yen to maintain a surplus of 1.8 trillion yen. The unsecured overnight call rate fell to 0.02% at one point. The weighted-average fell to 0.04%. This, coupled with the healthy reception at yesterday's six-year bond auction, helped extend the JGB rally. The benchmark bond yield fell 13 basis points to 1.69%, to bring its four-day decline to 23 basis points.

The decline in the overnight rate means that the BOJ has no more room to guide rates lower.

Rather than focus on the price of money, i.e., interest rates, policymakers will increasingly turn their attention to the quantity or supply of money. A Japanese newswire suggests the BOJ continues to grapple with finding a quantitative measure to use.

The decline to near zero in yields will likely boost interest in yen carry trades, whereby the yen is borrowed to finance the purchase of higher-yielding assets. Recall that recent reports suggest that some high-quality borrowers, using the swap market, were able to borrow yen and get paid to do so. In addition, such low overnight rates will encourage playing the Japanese yield curve, which entails borrowing from the call market at below 0.05% and lending back to the Japanese government at 1.60%, for a low risk yield pick-up.

Recent talk that one or more European central banks may have intervened to support the beleaguered euro has made the rounds recently, but has escalated in the last 24 hours. A British paper, the


, reports today that the


intervened by selling both sterling and dollars and bought the euro yesterday. The source: unnamed traders.

There is more talk today of intervention. Such talk, I suggest, is more reflective of psychology than the veracity of the claims. First, intervention is like an escalation ladder. Verbal expressions of concern would be the first rung of the ladder and European officials have, to the contrary, told the market repeatedly that the euro's weakness is not a cause of concern. Even though I am among the first to admit that the

European Union

has difficulty in speaking with one voice, generating such conflicting signals is not very likely.

Second, the Bundesbank, like other European central banks, conducts transactions for commercial purposes. All transactions in the foreign exchange market are not meant to convey a signal or affect trading. Since many central banks utilize electronic broker screens, their forays into the market are somewhat more transparent. But what really is behind the chin-wagging is anxiety as the euro approaches levels that correspond with important pschological areas of the German mark; namely 1.80 marks for the dollar and 2.90 marks for the British pound.

The fact that the euro's weakness has reached a point where the editors of

The New York Times

thinks it warrants a front-page story further illustrates of the powerful psychological forces at work. Treasury officials have been very clear that Japan ought not rely on depreciating the yen to stimulate its economy. The same applies to Europe.

That said, the dollar's price action against the European currencies may be warning of another consolidative phase, at least until Friday's jobs report.

Specifically, yesterday's dollar advance to new recent highs against the mark and Swiss franc were not confirmed momentum indicators. Bearish divergences have unfolded in the relative strength index. A break of the 1.7825 level against the mark and 1.4525 against the Swiss franc would confirm the beginning of the corrective phase. The euro requires a move above the $1.0960 area. Sterling's bounce against the dollar over the last couple of days may be a lead indicator that the dollar bulls are poised to take a breather.

The Bank of England left rates unchanged, breaking its string of five rate cuts in five months.

Recent data give hope that the manufacturing sector is past its worst, though if sterling's strength is sustained, fresh concerns may be spurred. Earlier Norway announced a 50-basis point cut in key rates. This puts the deposit rate at 7%. With the fall in oil prices squeezing Norway, look for additional rate cuts to be delivered.

Assuming that the

European Central Bank

doesn't cut rates at tomorrow's meeting, the focus in Europe turns to Sweden. Its key money market rate stands at 3.15% and was last cut in the middle of February. Deflationary forces have a strong grip in Sweden: Inflation is running at a negative 0.4%, and inflation expectations are also falling.

Marc Chandler is an independent global markets strategist who writes daily for At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at