TOKYO, JAPAN (Reuters) —The negative interest rate set by Japan’s central bank, effective on Tuesday, will add uncertainty to global economy and exert pressure on China’s currency, said economists.
The Bank of Japan followed other central banks last month to cut interest rates to minus 0.1 percent to boost economic recovery amid plummeting oil prices and slowing growth in China.
The move weakened the yen, which in turn could add pressure on China’s currency Renminbi as Beijing struggles to contain the outflow of money and prop up its own currency.
Peng Wensheng, chief economist of CITIC Securities, said Japan’s negative rate increased the volatility of the global financial market.
“I think first of all, it increases the uncertainty about global monetary policy outlook. I would say, as part of the results, the probability for the Federal Reserve to raise interest rate several times this year, that probability has declined. From that point of view, it also reduced somewhat the pressure on the Renminbi exchange rate. Looking forward, we believe that this adds some uncertainty to our own economic outlook and also more broadly the global monetary setting,” said Peng.
Japan’s direct investment in China dropped to 3.2 billion U.S. dollars in 2015, falling behind South Korea, with its investment totaling at 4.3 billion U.S. dollars and 7.1 billion U.S. dollars in 2014 and in 2013 respectively, according to the Ministry of Commerce data. Bilateral trade between the two countries is shrinking as well.
China is facing a dilemma between defending the stability of the yuan exchange rate and loosening monetary policy to boost domestic growth.
Chen Xingdong, chief economist of China at BNP Paribas, said the negative rate adopted by Japan for the first time ever would surely affect the exchange rate of China’s yuan.
“Before this kind of policy has a real effect on the Japanese economy, it will definitely have impact on the around-the-world market, and China is inevitably to be affected. So this is quite complicated. We can’t say that it’s a lot of impact, but definitely apparent impact on the currency situation,”said Chen.
China’s central bank governor Zhou Xiaochuan said last Saturday that there was no basis for the continued depreciation of the yuan and that “China would not let market sentiment be dominated by speculative forces”.
Zhou also said China would keep the yuan basically stable versus a basket of currencies while allowing greater volatility against the U.S. dollar.