Frankie goes to Tokyo


In a move that has surprised markets, Japan has followed the ECB and the central banks of Sweden and Denmark to introduce negative interest rates.

Japan’s attempt to de-value its currency is in response to China’s recent Yuan depreciation, and dovish statements from the ECB which announced that it could pursue further monetary easing if deemed necessary. This latest round of ‘Currency Wars’ reflects the turbulent start to 2016, whereby downward projections of growth and inflation have seen five-year bond rates tumble. The five-year Japanese bond yield has drifted negative for the first time, whilst the five-year German Bund now rests at -0.26. All of this is having a dramatic change in interest rate expectations.  

As the chart below shows, just two weeks ago, financial markets were projecting at least one or two rises in the US interest rate. Today, the majority believe rates will be kept on hold. Why does this matter? Well, our research team discussed that 2016 could be the year we move from a yield to rental-driven cycle to generate commercial real estate returns. Weaker growth and fragile financial market confidence may delay that transition, but on a positive note, the relative attractiveness of property, from a yield perspective, will continue to win admirers.

Implied probability


Source: CME, January 2016

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Michael Keogh

Mike Keogh

Director of Research

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