Rumors regarding the Bank of Japan and its potential to implement negative interest rates led to the yen edging downwards on Friday. Having negative interest rates essentially means that commercial banks would be paid for borrowing money from the central bank. The uncertainty surrounding the effectiveness of the potential policy change increased investor appetite for government bonds, as they experienced gains for the first time in two rough weeks. The speculation was due to a report surfacing, which detailed how the Bank of Japan would go forth in lowering their already negative interest rates. As a result of the report, the yen fell against two of its main alternatives, the dollar and the euro, and closed at 110.34 yen per dollar and 124.93 yen per euro.
The central bank of the island nation of Japan meets next week, and the possibility of lower interest rates is looming on the markets. The Bank of Japan utilizes two different systems for lending money. The first option is the BOJ provides capital to banks with zero-interest if said capital is used by the banks to deliver loans to firms that operate in high-growth sectors. The second means of lending is the central bank will offer long-term funds to banks with no interest on the condition that the bank gradually increases the amount of money it lends. According to the report that surfaced, Japan’s central bank is considering implementing negative interest rates on these two lending programs, which would lead to the BOJ paying commercial banks to borrow money. Jane Foley, FX strategist at Rabobank, shared her thoughts on the speculation, “That puts a different light on the BOJ meeting and suggests they might be more creative than the markets had given them credit for. Clearly we have seen the yen suffer on the back of that.”