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February 16, 2016

The Bank of Japan (BOJ) surprised markets in late January by introducing negative interest rates for the first time, cutting the rate on required reserves to zero and charging 0.1 percent interest on excess reserves, exceeding the required amount set by regulators.
The markets reacted to the news immediately with the Yen depreciating, the Nikkei 225 improving and government bond yields dropping into negative territory all the way out to 7 year terms.

In the words of the Bank’s Governor, Mr. Kuroda, the move is intended to change Japan’s “deflationary mindset” and comes 18 months after Denmark, Sweden and Switzerland imposed negative interest rates on their commercial banks. At that time, nominal yields on some short-dated bonds of highly-rated European governments dropped below zero, amid negative policy rates, very low inflation and “flight to safety” by investors. Similarly, yields on shorter-dated Japanese Government bonds have fallen to below zero since the January announcement while the benchmark ten-year JGB yield hovers just above zero. Looking ahead, Capital Economics expects 10-year bond yields to fall to negative 0.25 percent by the end of 2016 as markets price the expectation that the BOJ will push interest rates further into the negative territory.

In Europe, the Danish Krone and Swedish Krona depreciated 15 to 20 percent against the U.S. Dollar following the adoption of the negative interest-rate strategy, with the Swiss Franc remaining strong due to its status as a safe haven currency. In Japan, the Yen initially fell following the announcement but has since rebounded as investors seek a safe haven in the Japanese currency. There is, however, a rising likelihood that the BOJ will further lower interest rates this year amid weak GDP growth and a strengthened Yen. Along with a lift in exports, a weaker Yen should help see an increase in tourist spending, particularly benefitting both the hotel and central retail sectors in Tokyo. On the other hand, expected foreign exchange losses may decrease foreign investors’ returns.

For real estate investors, negative bond yields allow real estate yields to further compress whilst maintaining the existing spread.

”We could see a continuation of strong commercial property capital growth in Japan with the wider spread to other asset classes spurring investment; however there is the possibility that some investors will interpret this move to mean that Japan’s economy is weaker than previously believed, slowing deployment of capital,” says Dr Megan Walters, Head of Research for Asia Pacific Capital Markets at JLL.

“In Europe, subzero rates in Denmark and Sweden have helped fuel a surge in house prices of between 7 percent and 14 percent respectively towards the end of 2015; with banks in Japan already adjusting their mortgage rates, Tokyo residential markets may follow suit, providing an opportunity for investors in the residential and multifamily sectors.”

Dr. Megan Walters
Head of Research, Asia Pacific Capital Markets, JLL

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