Worries Over Unintended Consequences of Central Bank Action in Financial Markets

Despite the Bank of Japan’s efforts to push down its currency and jump-start the economy with negative interest rates, the yen is up 8% this year and is at its strongest level against the dollar since October 2014. European central bankers are having similar problems containing the strength of the euro and other currencies.

These difficulties are a reminder that the long stretch of exceptionally low rates in response to the 2008 financial crisis has created market distortions that may be difficult for central bankers to contain.

This disconnect could produce more volatility in financial markets. Even if investors can predict what actions central banks are likely to take, they are having a hard time predicting how markets will react, potentially sparking a pullback from riskier assets, such as emerging markets or commodities.

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A number of government bonds are yielding below zero in places like Japan, the eurozone and Switzerland. Money managers said this has added to concerns that central banks are distorting the normal market function and that investors are finding it difficult to fairly value financial assets.

Analysts said central banks need to pay attention to the unintended fallout on markets and banks from tools such as negative interest rates.

Zeng, Min and Iosebashvili. "Global Currencies Soar, Defying Central Bankers," The Wall Street Journal., Friday, March 18, 2106, A1, Accessed on March 18, 2016, http://www.wsj.com/articles/global-currencies-soar-defying-central-bankers-1458258134