Bank of Japan Gov. Haruhiko Kuroda on Wednesday called a negative interest rate a “powerful weapon” for monetary easing, saying the bank will cut it again if needed to conquer deflation.
“The objective of monetary easing is to push down the entire yield curve,” as lower interest rates would help companies and households, Kuroda said in a speech in Tokyo.
The BOJ surprised the market on Friday by announcing a rate of minus 0.1 percent on cash above a threshold that financial institutions hold at the central bank.
“If judged necessary, it is possible to cut the interest rate further from the current level of minus 0.1 percent,” the BOJ chief said, noting that the European Central Bank has set its deposit rate at minus 0.3 percent and some other central banks in Europe have adopted higher negative rates.
Kuroda said the new measure was aimed at addressing downside risks stemming from a slowdown in China and emerging markets that could hurt business confidence and affect the inflation trend, which has been improving.
“There is a risk that firms’ fixed investment stance and price- and wage-setting stance will become cautious,” Kuroda said. “If such risk materializes, the virtuous cycle of economic recovery from income to spending would be impaired and the underlying trend in inflation would also be affected.”
Since the BOJ’s latest decision, the yield on benchmark 10-year Japanese government bonds has fallen sharply, with the yield on the No. 341 issue plunging to a record low of less than 0.05 percent on Wednesday morning.
Tokyo stocks slumped Wednesday, as a sharp sell-off in oil prices added to fears of a global economic slowdown. The Nikkei average ended down 559.43 points, or 3.15 percent, at 17,191.25.
Kuroda said the central bank will carry out government bond purchases under its monetary policy “by paying due attention to how a negative interest rate affects the dynamics” of the government bond markets.
As the BOJ now has the means to conduct further monetary easing through the three dimensions of quantity, quality and a negative interest rate, Kuroda said the central bank has “the most powerful monetary policy framework in the history of modern central banking.”
Countering the view among some market participants that the BOJ is facing the limits of easing measures, Kuroda said he feels “uncomfortable” with such an argument.
“I am convinced that there is no limit to measures for monetary easing,” he said. “The BOJ will do whatever we can to achieve the price stability target of 2 percent.”