Negative interest for retail depositors unlikely: Kuroda


Japanese banks are unlikely to apply negative interest rates to deposits held by retail customers, Bank of Japan Gov. Haruhiko Kuroda said Thursday.

“Of course, the BOJ will consider additional monetary easing if necessary,” Kuroda told a House of Representatives Budget Committee meeting, showing readiness to lower interest rates further into negative territory.

But “individuals’ deposits will not become subject to negative interest rates,” he added, citing experience in Europe, where the European Central Bank has introduced negative interest rates.

Kuroda’s remarks came after the BOJ decided last Friday to apply an interest rate of minus 0.1 percent to some of the current account deposits that commercial financial institutions have at the Japanese central bank.

In response to worries that negative interest rates may hurt bank earnings, Kuroda said it only applied to some deposits.

“The biggest concern, which is about damaging the financial intermediation function, will be avoided to a considerable degree,” he said.

  • GBR48

    The ECB have proved that a negative rate doesn’t mean the sky will fall in – it just reduces banks’ profits and removes some financial products from the table.

    Things might get stickier if the banks decided to pass the costs on to their customers.

    More of a concern is the rationale: the belief by governments that more lending is inherently good.

    The credit crunch was caused by bad loans, so lending to people who stand less chance of paying those loans back is not a good thing.

    And in Japan, banks may already be too ready to loan unwisely.

    Japan’s urban areas have too many shops. That may sound like blasphemy. After all, we all like having a konbini within easy walking distance. But competition dilutes profits. If you have more shops, profits for each are thinner. That means wages have to be trimmed. Instead of a smaller number of people making good profits and paying good wages, you have a lot of people making small profits and paying low wages. This is a recipe for deflation.

    When shops find it difficult to make ends meet, they apply to the banks for more money. Just as Sharp has been maintained as a zombie corporation with banker’s money, so those shops you see that never seem to have any customers, are also kept in business with loans that are unlikely to be paid back.

    New shops are also opened on the back of bank loans, even if there are already other stores nearby selling the same thing. The banks make the loans, and all the local shopkeepers see their profits get thinner.

    This is a non-virtuous circle that creates stagnation and deflation, all driven by more lending, which the government seem to believe is a good thing.

    Like all such policies, Abenomics attempts to intervene in the market to direct its development, to put a political finger on the scales, and improve the economy. Unfortunately, such interventions can have all sorts of unforeseen consequences. They tend to expose flaws within any economic system, such as a readiness to lend money unwisely.

    For an economy based upon modest inflation, you need to make changes that ensure businesses are making money, enough money to pay higher wages. Those who are not making money need to be wound up, not kept alive with more loans. It isn’t the end of the world. Start again doing something different. There are a lot of different ways to make money.

    Free market capitalism only works if unprofitable businesses are allowed to fail, which allows better businesses to make more money. Simply pushing banks to lend more, may be counterproductive. It may end up supporting more zombies, diluting the profits of well-run businesses, and not just shops. This can operate across the board.

    Some tough love may see some shops and other businesses close, boosting the profits of those that remain: Darwinism in the retail sector.

    The alternative, having lots of low-profit businesses, lower wages, stable prices and deflation isn’t the end of the world either, despite what politicians seem to think. You can operate a sustainable nation in such circumstances, but you have to embrace it, not wage war on it. If that is how Japan works, culturally, then brute force political manipulation to create inflation is unlikely to end well. Deflation doesn’t stop people making money, they just have to work harder at it. It can be a healthy, sustainable option if you embrace it.

    What you can’t do is both. You can’t allow an unreformed economy full of low-profit commerce, supported by loans, to continue, alongside a drive to inflation. It’s like steering a car two different ways at the same time.

    Either reform Japan Inc., shake out the economy, stop the banks from operating a commercial welfare state, look on as the unprofitable parts of the commercial sector go bust, and be prepared to operate a formal welfare state for those who lose their jobs and require support, or accept deflation and implement policies that support it across the board, socially, culturally and economically.

    Doing bits of both will cost a lot of public money and achieve little.