How surprising is the Bank of Japan’s move as far as keeping those interest rates unchanged at ultra-low levels?
Yes, this came as a bit of a surprise to markets. I think people were expecting that the Bank of Japan would be a bit more in line with most of the other world central banks, which is a path of raising rates and I think they caught a lot of people off guard when they really kept to a policy that they have had for decades. I think that one nuance here is they widened the band recently, which I think was taken as a sign that they were going to relax yield curve control overall. But ultimately they didn’t. The yen has recovered most of its losses at least against the dollar and of course, the Japanese stock market reacted very positively because equity markets like when central banks are friendly to them.
Well, they like the move, but going ahead from here, now that global recession is seemingly not as anaemic, there is this stark contrast that the Bank of Japan has gone ahead with keeping its interest rates at the levels that they have. So in terms of the market’s reaction to it, the up move that they have made, how differently do you think market sentiment is going to get affected with what has been done and can they sustain this?
I think you have to sort of separate Japan here from the rest of the world in terms of market reaction. I think this continues to reinforce the view that the Bank of Japan is a bit of an outlier and which is not a bad thing. Every major country is free to do whatever it feels best for its own citizens but the Bank of Japan is off on its own here. The other problem you have with this is because of the relentless action of the Bank of Japan over the past 20-30 years, the stock available of Japanese government bonds is very-very small in terms of the private market. The bank owns most of them and some will argue they own all of them, if not even more so. They are an island nation in terms of economic policy. So I think it is helpful but I think the world has to pay attention to what goes on to one of the G7 countries when they make economic decisions. But I think most investors are used to Japan marching to its own rhythm here.
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