Impact of BOJ decision uncertain

Experts are split on the impact that the Bank of Japan’s shock decision to adopt a negative interest-rate strategy might have on the Korean economy.

The reason behind the BOJ’s decision, which was the first in five years, on Friday was clear: Global market uncertainties including falling crude oil prices and the decelerating Chinese market have become a major threat and the Japanese government took preemptive steps to prevent its economy from being dragged back down to deflation.

What isn’t clear, however, is how the Korean market will respond and attention is now focused on the Korean central bank’s interest rate decision on Feb. 16.

While some experts believe that the Japanese central bank’s action will have little influence on the Korean central bank, others expect a rate cut especially since the market situation hasn’t improved despite the government’s strong faith that the economy will expand by 3 percent by the end of the year.

“The fact that the Japanese central bank has decided on a negative interest rate after the European central bank did the same clearly shows that the global economy continues to struggle from breaking free of the financial crisis,” said Han Sang-wan, Hyundai Research Institute director. “Even the Korean government decided to front 58 percent of the budget in hopes of preventing the entry of risks from home and abroad.

“Eventually in the second half the government will try to stimulate the economy through supplementary budget and additional interest cuts.”

Park Hee-chan, a researcher at Mirae Asset Securities, said the possibility of a rate cut is growing as spending from the private sector that helped the overall economy expand last year will drop significantly since most spending was the result of temporary measures, including the “Korea’s Black Friday” sales event, and individual consumption tax cuts that ended at the end of last year.

After BOJ Governor Haruhiko Kuroda announced the key interest rates cut to minus 0.1 percent from a positive 0.1 percent the world’s markets responded positively.

Tokyo’s stock market rose 2.8 percent on Friday and other Asian markets including Shanghai saw a sharp growth of 3.09 percent and the Hang Seng grew 2.54 percent. On Wall Street, the Dow Jones also climbed nearly 2.5 percent.

These positive moves were largely because of growing expectations that the minus interest rate program will force Japanese banks to increase their lending and investments to boost the country’s economy.

“The BOJ pointed out that it expects companies to use its excess cash to make investments in machinery and equipment as well as human resources, effectively,” said Harumi Taguchi, economist at IHS Global Insight. “Weaker corporate confidence could suppress wage increases during annual negotiations between companies and unions set for the first quarter of 2016. The central bank also said that the weak yen is supporting sustainable inflationary expectations due to higher import prices.”

The BOJ’s action is also expected to affect some of Korea’s major export products, such as automobile and steel largely because of the weakening yen.

But some say it won’t be easy for BOK Governor Lee Ju-yeol to further lower Korea’s key interest rate, which is already at an all-time low of 1.5 percent. This is largely because of the ever-growing household debts and credit purchases that exceed 120 billion won ($99.2 million). Additionally, the lowering of the Korean interest rate could also trigger a massive pull out of foreign investors.

BY LEE HO-JEONG, YEOM JI-HYEON [lee.hojeong@joongang.co.kr]