• Kyodo

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Bank of Japan Deputy Gov. Hiroshi Nakaso said Thursday that expanding the central bank’s negative interest rate policy is still a key tool that could be used to pave the way to its 2 percent inflation target, but emphasized the undesirable impact of the controversial measure.

The negative interest rate policy has created several positive effects, including growth in corporate lending, but “the flip side of such positive developments is the growing pressure on financial institutions’ profits,” Nakaso said in a speech in Tokyo.

Nakaso, who has worked at the BOJ for more than 30 years and is well-versed in its inner workings, said a drastic downturn in lending rates has weighed on the earnings of private financial institutions.

“This can be seen from the larger fall in lending rates relative to a marginal decline in rates on deposits,” he said. “For Japan, the impact of the negative interest rate policy on the profits of financial institutions tends to be relatively large,” he said.

Financial market participants are closely watching what the BOJ will do next to achieve its inflation target. The central bank has pledged to conduct a “comprehensive assessment” of the aggressive monetary easing policies it launched over three years ago when it kicks off its two-day Policy Board meeting on Sept. 20.

Nakaso emphasized that the BOJ is eager to take additional monetary easing steps, while hinting that another negative interest rate cut is possible.

“A static and uniform judgment that rules out any further cuts in the negative interest rate in view of financial institutions’ profits would not be the right approach,” Nakaso said.

“I think I fully recognize the effects of the large-scale monetary policy on financial institutions and financial markets, and the likely impacts if the policy is to continue,” he said. “Based on this recognition, we will take measures that we judge necessary for Japan’s economy.”

On growing speculation that the central bank may start to purchase foreign bonds, Nakaso told reporters after the speech that the bank’s monetary policy is “not aimed at” foreign exchange rates.

If the BOJ were to buy foreign bonds, the central bank would have to sell yen for foreign currencies such as dollars, which would drive down the Japanese currency. The yen’s recent appreciation has been a drag on the competitiveness of the country’s exporters, sapping economic growth.

Such an idea has been repeatedly put on the table as a step to jump-start the nation’s export-oriented economy. But the Finance Ministry has struck it down, asserting that it would effectively represent currency market intervention, which is its exclusive preserve.

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