The Bank of Japan in January adopted negative interest rates. It introduced a three-tier interest rate system that splits the Bank of Japan's balance of current account in three parts and applies different interest rates on them. A positive interest rate of 0.1% is applied on the Basic Balance, while a zero interest rate is applied on the Macro Add-on Balance. And a negative interest rate of 0.1% is applied on the Policy-Rate Balance.

"As the BoJ's growth and inflation outlook is facing larger downside risks, attributable to the possibility of more China turbulence later this year, we now expect the bank to cut the policy-rate balance rates (currently -0.1%) further into the negative territory, first by 20bp to -0.3% at the June meeting and by 10bp more in H2 this year to -0.4%", says Nordea Bank.

Additional interest rate moves is not expected from the BoJ in the coming three months. There are many reasons for that, first of which is China. Kuroda, in his recent speech, continued to be positive regarding Japan's inflation outlook and growth. The main concern was China's economic uncertainties. The central bank can manage to keep a wait-and-see mood as heavy intervention from China has reduced the volatility in recent times.

Secondly, with high number of speculations from the market on a possible rate cut during March meeting, any move is expected to mostly disappoint rather than impress. Also, the negative rate policy adopted in January was by a very narrow majority, implying that the central bank board members are divided on the decision. Lastly the annual wage negotiations will begin in mid-March. The central bank might wait for the negotiation result to examine the new inflation and growth outlook.

The main reason for the forecast that Japan will lower rates twice later in 2016 is China. The equity and currency market volatility continues to be the biggest threat in 2016. It is not convincing that the authorities have the necessary means to stop the stock market from plummeting further. A new equity sell-off might trigger renewed depreciation pressure on the CNY and deepen capital outflows. Then a likelihood of a one-off CNY devaluation will again be put on the table, creating negative spill-overs in the entire Asian region. The BoJ, in this scenario, might respond by pushing rates further into the negative territory.