Bank governor Kuroda, commenting on the decision said: "If judged necessary, it is possible to cut the interest rate further. The constraint of the 'zero lower bound' on a nominal interest rate, which was believed to be impossible to conquer, has been almost overcome by the wisdom and practice of central banks, including those of the Bank of Japan. It is no exaggeration that [ours] is the most powerful monetary policy framework in the history of central banking." He really did say this.
10-year JGB yield
They are certainly not the first to dabble with novel concepts. That mantle goes to Sweden which, after raising rates in 2010 claiming the economy had overcome the 2009 crisis, was forced to start cutting again in 2011, taking the deposit rate into negative territory in 2015; it currently stands at minus 1.10 per cent. Switzerland, too, took the plunge in January 2015 with a central target rate of minus 0.75 per cent, fighting a superstrong Swiss franc.
Swiss two-year Conf yield
But negative bond yields do not necessarily mean that we are all guaranteed to lose money. There are so many ways the gullible can be parted from their cash, whether it's piling in to a Ponzi scheme, getting roped in to a new business, or even buying bank bonds and shares. Note that the yield on low-quality US corporate bonds is currently 20 per cent (the highest in six years); there is a reason for this.
So remember, as yields fall, prices rise and bond maths is perfect. There is an initial outlay to names of varying qualities, an income stream (coupons), and a final repayment at a set date. Look at the creditworthiness of the borrower, the value of the other three elements, and decide if it's for you, keeping in mind what your alternatives are. As yields fall, the need to be generous with dividends drops. Why pay out when you don't have to?
FTSE 350 versus Gilt index
Index-linked yields have embedded in them an option, the value of which can be calculated separately via inflation expectations. These, and current inflation, will set the framework for pricing the optionality. Most readers will be anchored in an inflationary, and even hyperinflationary (myself) environment. But millennials, growing up in an era of comparison sites and tumbling electrical goods' prices, 'get' deflation.
The cost of other things is dropping. Last week the United Nations' Food & Agriculture Organization announced that global food prices were down 16 per cent in the year to January 2016, their lowest level since April 2009. Leading the declines were sugar, dairy products, cereals and vegetable oils. Also last week Stelios Haji-Iannou of easyJet fame opened a food shop in north London where everything cost just 25p - and Poundland was no longer cheap as chips. This week Tidjane Thiam vowed that the cut to his bonus would be bigger than any of Credit Suisse's leadership team.
Not exactly 'less is more', but some have grasped the new lower boundaries.
US 10-year Treasury yield
