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1 year on, BOJ negative rate policy yet to prove effective

Reuters

A woman looks at clothes at one of Fast Retailing’s Uniqlo stores in Tokyo on Jan. 24.

Jiji PressTOKYO (Jiji Press) — The Bank of Japan’s negative interest rate policy has yet to produce its intended price-raising effects one year after its introduction, while side effects have become visible, such as thinner profit margins eating into bank earnings.

On Feb. 16 last year, the Japanese central bank introduced the unprecedented negative interest rate policy so as to buttress its “quantitative and qualitative” monetary easing policy for achieving its inflation goal of 2 percent.

Under the policy, the BOJ started applying an interest rate of minus 0.1 percent to some of the current account deposits held by commercial financial institutions at the central bank, in effect charging interest on their deposits.

The policy is aimed at encouraging banks to use surplus funds, rather than stashing them at the BOJ, for loans to businesses and individuals to help spur the economic growth and push up prices.

However, Japan’s core consumer price index, which excludes often volatile fresh food prices, has kept on falling year on year, still being unable to get on a rising track.

Some critics say the BOJ’s monetary easing has reached its limit, but the BOJ maintains its aim of achieving the 2 percent inflation target and is thus expected to keep pushing ahead with the negative interest rate policy.

BOJ Governor Haruhiko Kuroda told a House of Representatives committee meeting on Wednesday that the negative interest rate policy has been effective in lowering the interest rates on corporate lending and housing loans.

Kuroda also said the monetary policy steps taken by the BOJ, including the adoption in September last year of a new policy framework of controlling the yield curve, were “necessary and appropriate” for achieving its price target.

But Takeshi Kunibe, chairman of the Japanese Bankers Association, said in January, “We are not yet seeing many positive effects [of the negative rate policy] on the real economy.”

The unorthodox policy has dealt significant blows to many financial institutions’ earnings.

As Japan’s long-term interest rates have fallen deeper than the BOJ had expected since the start of the negative rate policy, banks’ profit margins have narrowed in their lending operations, while pension fund managers and insurance companies have faced difficulty securing sufficient investment returns.

Regional banks have been hit especially hard, with their operations centering on loans to domestic clients. Many such banks are expected to report profit falls for fiscal 2016, which ends in March.

“We don’t want the negative interest rates to drag on and on,” a regional bank official said.Speech

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