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2 years on, negative interest rates deliver mixed results

The Yomiuri Shimbun

The Yomiuri ShimbunNearly two years after the Bank of Japan introduced negative interest rates, the unconventional policy has produced mixed results.

Although Japan’s economy continues to recover moderately, the inflation rate remains below the central bank’s target of 2 percent. The negative interest rate policy has lowered interest rates on loans, which has sparked positive effects including increased corporate capital investment and real estate transactions. However, the unwelcome side effects include the crimping of bank profits.

“An extremely accommodative financial environment has become a reality,” Bank of Japan Gov. Haruhiko Kuroda said at a meeting of the House of Representatives’ Budget Committee on Thursday. “Corporate profits are at their highest level ever, and the labor market is in a state of full employment.”

Kuroda’s comments emphasized that a low interest rate environment, including the negative rates, were leading to an economic recovery.

Friday will mark two years since the bank introduced negative interest rates. In 2016, there were mounting fears about China’s economic slowdown, and financial markets around the world were jittery. As anxiety grew over the future of Japan’s economy, the inflation rate was hovering around zero percent.

The launch of the negative interest rate policy has broadly lowered both long-term and short-term interest rates. The distribution yield on 10-year government bonds, a leading indicator of long-term interest rates, even temporarily sank into negative territory. Banks lowered the interest they charged on loans, which spurred companies to invest more money in plants and equipment and individuals to buy homes.

In the April-June quarter of 2016, immediately after the policy was introduced, new loans extended by banks for investment in plants and other facilities jumped by nearly 20 percent from the same period a year earlier.

Rates on loans down

However, the Japanese Bankers Association has pointed out that many banks have been hurt by the negative interest rates. “They have been a real body blow,” said Nobuyuki Hirano, chairman of the association and president of Mitsubishi UFJ Financial Group.

For example, in consolidated results for the April-December 2017 period, net operating profit — the earnings from core business operations — of banks under the umbrella of the nation’s three megabanks plunged 28 percent from the same period in 2015 to about ¥1.3 trillion.

Banks make profits by loaning money from deposits to companies and individuals at higher interest rates than the banks pay to depositors. With little leeway to lower interest on deposits, the large drop in interest on loans has stung many banks. It also is possible that if a bank’s financial strength declines, it could hesitate to offer risky loans.

The super low interest rates also are having a negative impact on the livelihoods of pensioners who rely on their savings. The yield on government bonds and corporate bonds is extremely low, so insurance companies and asset management firms focusing on the domestic market are struggling to cope.

“If monetary easing policies remain in place for a very long time, many problems could become worse in the future,” Hitoshi Suzuki, a member of the central bank’s Policy Board, said at a press conference in Wakayama on Thursday.

Policy could be here long-term

The negative interest rate policy was a desperate effort to quickly achieve the central bank’s inflation target by stimulating economic activity, even if this meant temporarily sacrificing the profits of financial institutions. However, the inflation rate remains stuck below 1 percent, so it looks like this policy is set to stay for a prolonged period.

Given the instability of stock prices, some observers believe the interest rate of minus 0.1 percent should be lowered further as a method to add some steel to the monetary easing policy.

The Bank of Japan has plenty of problems on its plate as it steers the negative interest rate policy.Speech

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