Below zero interest rate

STOCKS around the world got another boost on Friday from the Bank of Japan’s (BOJ) surprise move cutting interest rates below zero.

Local stocks did especially well. Total value turnover that day rose by nearly 68 percent from the average daily trading transaction for the year, aided by net buying activities of foreign investors which also increased to more than double the aggregate of their net buying transactions for the first four trading days of the week.

These factors made the PSEi end in the positive territory with a weekly gain of 7.72 percent or 479.57 points at its close of 6,687.62.

Like most of the world’s equity market indices, the PSEi remained on the negative in January. Its trading performance last week, however, slashed the market’s loss by 61.22 percent, resulting in year-to-date loss of only 3.80 percent or 264.46 points.

Leading the advance was the holding firms sector with a gain of 9.84 percent or 566.51 points and total turnover value of P9.68 billion. The property sector followed with a gain of 8.91 percent or 217.83 points and turnover value of P7.01 billion.

With a net advance of 8.58 percent or 120.13 points and turnover value of P6.42 billion, the services sector followed. The rest booked advances ranging from 3.3 to 4 percent, led by the mining and oil sector that rode on the recent rebound in oil prices.

These factors pushed total market capitalization 5.47 percent higher last week at P12.63 billion.

Japan is known to be the first economy to experiment with quantitative easing (QE)—a process in which “the central bank purchases government securities or other securities from the market” to lower interest rates and increase money supply.

The securities can be foreign currency, company bonds, asset-backed securities, stocks or even commercial loans.

The QE process is also referred to as “electronic printing.” However, QE does not involve the literal printing of new bank notes to flood financial institutions with capital.

Surprising everyone, the BOJ introduced last Friday its negative interest rate program of -0.1 percent deposit rate for banks. The intent was to penalize the banks for hoarding their cash and “force them to pump more cash into the economy and, hopefully, boost economic activity.”

The European Central Bank (ECB) first thought of using negative interest rates in 2014, alongside its QE program. This came as the easy money policy put in place to boost economic revival showed some stalling.

The idea behind QE is that it would put cash into the pockets of consumers and businesses that, in turn, will encourage them to spend.

But the program at the Eurozone did not turn out as planned. Instead of pushing up asset prices, the program “seemed to have widened the gap between the wealthy and the poor.” Overall consumer spending was low.

Facing the same risk, the BOJ adopted the strategy of cutting interest rates to below zero. It has somehow deterred people from saving and encouraged them to spend as in the ECB’s initiative.

Economic theory, however, suggests that the danger in negative interest rates is that it may also “drive people toward hoarding their cash at home, in mattresses or in warehouses, for leaving their money in the bank will cost them, too.”

The move by the BOJ was criticized by some as a “tactic of last resort” and a sign that other tactics were failing.

The BOJ has already been “buying 80 trillion yen ($674 billion) in assets a year, putting nearly a third of Japan’s massive bond market in its hands.” After three years of asset purchases, Japan’s inflation target looks still far away.

Analysts said “recent volatility in global markets has likewise threatened to undo some of what the BOJ has achieved with its easing money program: a weaker yen and higher stock prices.”

In other words, the decision was meant to limit the risks that global conditions may bring to derail previous gains. Nonetheless, the BOJ may have a few policy options left.

Japan has been “under the threat of sliding back into stagnation for much of the last two decades.” It has been seen as the archetype of what might eventually happen to all developed economies—“falling population, record levels of debt, falling productivity.”

All eyes are on the BOJ’s negative interest rate, if it “will finally provide the major stimulus Japan has been looking for since the 1990s.”

Bottom line spin      

We expect more market volatility in the coming months and we will see how different factors and decisions that have been made will pan out.

After the big sell-off by foreign investors that have driven down our market since the start of 2016, their average percentage of participation to total market transactions have also slipped. As of the end of last week, the level was down to 51.99 percent from 54 percent.

Based on my calculations, our market may still have to sit this one out for a while before catching up with other major markets. PSEi’s average asset prices remained relatively high at 18.85x, with the industrial and holding firms sectors beyond the average.

(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider through [email protected], [email protected] or at www.kapitaltek.com)