BOJ policymakers in heated debate over negative interest rate: minutes

Kyodo, Bloomberg

Bank of Japan policymakers were aware of the need for pre-emptive action to achieve an inflation target, but some voiced concern a negative interest rate could cause confusion, minutes of the central bank’s January policy meeting show.

The Jan. 28-29 meeting of the nine-member Policy Board came amid turbulence in financial markets, with tumbling oil prices stoking concern about their negative effect on inflation expectations in Japan.

Many members expressed the view that the introduction of a negative interest rate was desirable to curb the risk of inflation stagnating and maintain momentum toward the BOJ’s 2 percent inflation target.

One member said that “now was the defining moment for Japan’s economy to maintain momentum,” and that the central bank should implement additional measures, according to the minutes, released Friday.

But a few members disagreed, saying that the launch of a negative interest rate program could be misunderstood.

“A few members pointed to the possibility that if the bank were to introduce a negative interest rate immediately after the introduction of supplementary measures for QQE (quantitative and qualitative easing), this might instead be misunderstood as approaching a limit to its asset purchases.”

The minutes also showed that a few members expressed concern that there would be an increase in confusion and anxiety among financial institutions and depositors.

One member said the negative rate policy could lead to “competition with overseas central banks to lower interest rates deeper into negative territory.”

In an unprecedented move the BOJ decided, in a 5-4 vote, to impose a 0.1 percent charge on part of the reserves financial institutions hold at the central bank.

At the meeting, the BOJ also pushed back the time frame for hitting its 2 percent inflation target to the first half of fiscal 2017 from the latter half of fiscal 2016.

Since the introduction of the negative rate in mid-February, some banks have cut mortgage rates and deposit rates, while bank shares were sold off. The rate policy has also prompted financial institutions to pile into government bonds, pushing the yield on the 10-year government bond into negative territory.

Meanwhile, the minutes show that the members did not discuss expanding QQE.

“The minutes reinforce a view that the next easing will be a combination of a rate cut and expansion of QQE,” said Yasuhiro Takahashi, an economist at Nomura Securities Co. in Tokyo, referring to the BOJ’s asset purchases.

“There wasn’t much explanation why they didn’t expand asset purchases in the minutes, but I think that’s probably because the debate would have been about the limits of QQE and they didn’t want to draw attention to it.”