Why the Bank Of Japan’s Move to Negative Rates Signaled the Beginning of the End

If you want to be successful in the markets, you need to pay close attention to inflection points. Correctly evaluating an inflection point is the key to understanding market sentiment. And once you understand market sentiment, you’ll be able to determine which way an asset will trend.  

An inflection point is a critical juncture in an asset’s price. It’s a sort of crossroads, where after a big fundamental piece of news is released, the price takes off in either direction.

For example, say a high-growth tech company that’s been one of the best performers over the past few years is now reporting earnings. The company ends up releasing great earnings, but its stock price plummets the next day. This negative price reaction can be taken as a signal that investors were disappointed. Their expectations were not met, and the company’s share price suffered as a result.

The price reaction to earnings revealed the change in sentiment towards the company. This tech company had been a true high-flyer before this latest earnings report. But after the release, the stock was punished, and all because earnings underwhelmed. The change in sentiment likely signals the start of a new trend for the stock. And in this case, that new trend is most probably downward. The earnings report and subsequent price action combine to form a key inflection point that lets us determine the new sentiment and trend. This helps us stay on the right side of the trade.

Foundation Investing recently identified a HUGE inflection point in the dollar yen cross rate (USDJPY). This occurred after the Bank of Japan’s (BOJ) negative rate announcement on Jan. 29th. In global markets, central bank policies largely dictate capital flows. So we make sure to listen closely when the big boys talk.

The USDJPY narrative started back in late 2012. Newly elected Prime Minister Shinzo Abe immediately implemented his economic stimulus plan “Abenomics” to reinvigorate the Japanese economy. A big part of this plan involved monetary easing on behalf of the BOJ. And so the central bank started printing money like mad to buy financial assets. This caused the yen to dramatically weaken against the US dollar.

Shinzo Abe Weakens Yen

The stimulus plan worked for a bit. The Nikkei had a huge bull market run from 2013 to 2014. But in 2015, things changed. The market stopped making new highs, inflation dropped like a rock, and the global deflationary slowdown began. The stimulus planned failed to spur any further substantial growth for the entirety of 2015. In response, the BOJ announced Negative Interest Rate Policy (NIRP) on Jan. 29th, 2016 for the first time ever.

Negative interest rates force banks who deposit funds with the BOJ to PAY to keep them there (crazy right?). This is supposed to incentivize them to loan their money out instead of hoarding it, thereby creating a stimulative effect on the economy.

So what happened after the announcement? By traditional logic we would expect USDJPY to rally, which means a stronger dollar and a weaker yen. NIRP weakens a currency because investors are more likely to sell off assets that give them negative returns. With negative interest rates, the yen becomes ones of those assets. This would result in a lot of selling pressure on the yen, lowering its value. We expected to see this play out in the dollar yen cross rate. And at first impulse, that’s exactly what we got. Pictured below is an intraday chart of USDJPY. You can see a massive spike on the day of the announcement signaling a weaker yen.  

BOJ NIRP & Yen Depreciation

But look what happened a few days after the event…daily chart this time. USDJPY fell hard. The yen strengthened again.

BOJ NIRP & Yen Appreciation

This is what we call an inflection point. Key fundamental information (BOJ announcement) resulted in a counter-intuitive move in price. And not just a small one either. We would consider a small move just noise. But a large aggressive sell to new 52-week lows screams “inflection” loud and clear.

With this move, we believe the market is telling central bankers around the world that they don’t believe in stimulus anymore. The jig is up. The period of central bank manipulation has come to an end. Faith in the system has been lost.

It makes sense. The positive effects of stimulus had to end sooner or later. As more stimulus was pumped into the system, it had less and less of an effect. Think of a drug addict who constantly needs a larger and more potent fix to feel the same way he did on day one.

In financial markets we call this “pushing on a string.” This occurs when monetary policy can no longer entice consumers and businesses to spend or invest. At a certain point the economy becomes so weak that people are barely willing to take out loans and spend, despite rock bottom interest rates.

If we’re correct about this inflection point, equity markets around the world are due for a tumultuous year. It’ll be real tough for prices to rise without an “easy money” propellant working in their favor. The central bank backstop has been removed and there is a lot of room for these markets to fall. It would be dangerous to go long at this point. There might only be one thing that can rally in this environment. And that’s bonds. US treasuries will be the best place to invest to weather the coming storm.



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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.