Japan’s stock market traded sharply higher on February 1 as investors continued to cheer January 29 surprise move by the central bank to cut its rates.
Tokyo’s Nikkei 225 closed up 1.98% to 17,865.23 – its highest close since early January.
The benchmark closed up almost 3% on January 29 after the BoJ cut its rates to -0.1%.
The move is designed to spur inflation, investment and spending. Analysts said it was a turning point for the bank.
Elsewhere, manufacturing activity in China, the world’s second biggest economy, shrank more than expected in January from a month earlier, which dented confidence among investors.
Hong Kong’s Hang Seng index closed 0.5% lower at 19,595 in afternoon trade, while the Shanghai Composite was down 1.8% at 2,688.
China’s official Purchasing Managers’ Index (PMI) came in at 49.4 for the month compared to December’s reading of 49.7. The data marks the sixth month of contraction in the sector.
Expectations were for a reading of 49.6 for the month. A reading of above 50 indicates activity has grown, while a reading of below 50 indicates activity has contracted.
In South Korea, the Kospi index closed up 0.67% to 1,924.82, reversing earlier losses.
Disappointing trade numbers released on February 1 showed exports contracted 18.5% in January from a year earlier. It marks the 13th month in a row the nation’s exports have shrunk and is the worst result for exports since mid 2009.
Imports also contracted for the period by 20.1%.
In Australia, the ASX 200 finished the day up 0.76% at 5,043.60 following gains in the US.
The Bank of Japan (BoJ) has adopted a negative interest rate in a surprise move.
The benchmark rate of (-0.1%) means that commercial banks will be charged by the central bank for some deposits.
The BoJ hopes this will be a disincentive to banks to save and prompt them to lend in another attempt to counter the continuing economic slump in the world’s third-largest economy.
The eurozone also has negative interest rates, but this is a first for Japan.
It is a move that has been on the cards for Japan’s stagnating economy for well over 10 years.
The decision to go negative came after a narrow 5-4 vote at the Bank of Japan’s first meeting of the year on January 29.
“The BoJ will cut interest rates further into negative territory if judged as necessary,” the Bank of Japan said, adding it would continue as long as needed to achieve an inflation target of 2%.
Some analysts have cast doubt over how effective the rate cut will be.
In a press conference, the BoJ’s governor Haruhiko Kuroda said the weakening growth rate of the global economy was the main factor behind the move: “Japan’s economy continues to recover moderately and the underlying price trend is improving steadily… further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people’s deflationary mindset.”
Earlier in the day, fresh economic data had again highlighted concerns over economic growth. The December core inflation rate was shown to be at 0.1% – far below the central bank’s target.
Asian shares jumped and the yen fell across the board in reaction to the announcement. Japanese banks though saw their shares drop on the news as lenders are likely to see their margins squeezed even more.
The decision comes in addition to the BoJ’s massive asset-buying program, which over the past years has failed to boost growth.
The European Central Bank (ECB) has announced new measures aimed at stimulating the eurozone economy, including negative interest rates and cheap long-term loans to banks.
The ECB cut its deposit rate for banks from zero to -0.1%, to encourage banks to lend to businesses rather than hold on to money.
It also cut its benchmark interest rate to 0.15% from 0.25%.
The ECB is the first major central bank to introduce negative interest rates.
It has been tried before in smaller economies. Sweden and Denmark, who are both outside the Single Currency, attempted to use negative rates in recent years with mixed results.
Analysts said in Sweden it had little discernible impact; in Denmark it did have the effect of lowering the value of the currency, the Krone, but according to the Danish Banking Association it also hit the banks’ bottom line profits.
The ECB’s president, Mario Draghi, also announced other measures.
Long term loans are to be offered to commercial banks at cheap rates until 2018. These loans would be capped at 7% of the amount that the individual banks in question lend to companies. Thus, the more the banks lend to companies, the more money they can borrow cheaply from the ECB.
The ECB cut its benchmark interest rate to 0.15 percent from 0.25 percent
It is also doing preliminary work that could lead to buying bundles of loans that are made to small businesses in the form of bonds. This is being seen as a step towards providing companies with credit through the financial markets.
Mario Draghi said the ECB’s policymakers unanimously agreed to consider more unconventional measures to boost inflation if it stays too low. The ECB stopped short of instituting a large asset-buying program like the quantitative easing (QE) undertaken by the US Federal Reserve. However. Mario Draghi insisted that more would be done, if necessary.
“Are we finished? The answer is no. We aren’t finished here. If need be, within our mandate, we aren’t finished here.” he said.
Mario Draghi said that the whole package of measures was aimed at increasing lending to the “real economy”.
“Now we are in a completely different world,” he said.
Even though some of the measures, like the more to negative rates on deposits, were expected European shares moved higher on the ECB announcement.
The benchmark German DAX 30 index jumped above the 10,000 level for the first time. The CAC 40 in Paris was up 0.8% shortly after the ECB’s comments.
Meanwhile, the euro fell to $1.3558, its lowest level in four months.
Although the danger of deflation in the eurozone is limited, the ECB is concerned that growth is very sluggish and bank lending weak – both of which could potentially derail the fragile economic recovery.
The eurozone economy grew by just 0.2% in the first quarter of the year. Consumer spending, investment and exports are all growing at a slower pace than this time last year.
Inflation in the eurozone fell to 0.5% in May, down from 0.7% in April. This is well below the European Central Bank’s target of just below 2%.
If the eurozone slips into deflation, the fear is that consumers might spend even less because they would expect prices to fall in future months. For the same reason investors could stop investing.
Growth would then be hit and demand would be severely constrained. The large debts amassed by the eurozone’s countries, companies and banks would take longer and be harder to pay off.
Unemployment, which is already at nearly 12% in the eurozone, and much higher in places like Spain, Portugal and Greece, could get even worse.
Mario Draghi emphasized that recovery in the eurozone was not just in the hands of the ECB, but also in the domain of the banks and the governments. He said the banks needed to play their part by increasing lending and reforms by national governments should be carried through.
“In order to strengthen the economic recovery, banks and policy-makers in the euro area must step up their efforts. Banks should take full advantage of this exercise to improve their capital and solvency position, thereby contributing to overcome any existing credit supply restriction that could hamper the recovery.”
“At the same time, policymakers in the euro area should push ahead in the areas of fiscal policies and structural reforms,” he added.
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