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Weekly Feature: Slashed rates leave yen in tatters

The yen has weakened with astonishing speed against the US dollar after the Bank of Japan made the shock announcement on 29 January that it was introducing a negative interest rate policy – just days after Governor Haruhiko Kuroda dismissed speculation that the Bank would ever do something so drastic. Nor has the Bank ruled out further reductions to its interest rates: “The [Bank of Japan] will cut the interest rate further into negative territory if judged as necessary."
 
The Bank blindsided financial markets across the globe on Friday by opting (in a vote of 5-4) to introduce negative interest rates of 0.1% on deposits. It’s the first time Japan has ever adopted such a measure, so it seems the embrace of negative interest rates is a bid to protect the world’s third-largest economy from current market volatility and concerns over the global economy as a whole.
 
As a result, the Greenback surged 1.68% to its best position since 21 December 2015. It stabilised at more than 2% above the yen before the Bank of Japan announced its decision.
 
It wasn't just the dollar that strengthened: The euro also rose by 1.45% against the yen, and Sterling and the Australian dollar also made gains on the yen, increasing by 1.25% and 1.60% respectively.
 
The Bank hoping that Japanese business confidence will improve, and can avoid the problems experienced by China (data released earlier in the month showed that 2015 was the Chinese economy’s slowest period of growth in 25 years).
 
Official data also showed on Friday that Japan's inflation rate was 0.5% throughout 2015 – well below the Bank’s target of 2%. That objective looks to be well out of reach, as the Japanese Government has so far failed to stir up more spending to help increase prices.
 
In a bid to make it more achievable, the deadline for reaching the 2% goal has now been moved to the first half of 2017, rather than the second half of this year.
 

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