The Bank of Japan is now even more unlikely to lower its negative interest rate following a move to cushion its impact on regional banks, according to a former BOJ official.
The BOJ’s offer of 0.1% interest on some reserves at eligible local banks reflects its growing concern over the health of the regional banking sector, according to Atsushi Miyanoya, a former executive director who was in charge of assessing the financial system at the central bank.
"Theoretically, monetary policy is independent from prudential policy,” said Miyanoya, in an interview last week. "But diving deeper into negative rates is probably difficult after this.”
To gain eligibility for the interest payments, regional banks must make decisions on merging or show they have improved their profitability.
The move shows intensifying concern at the BOJ over the state of regional banks and the possible risks they present for the financial system. The pandemic has exacerbated their difficulties as profits erode amid continued low rates and rapid population decline outside Japan’s big cities.
Private economists are split over the impact of the assistance on policy. Some say it makes it easier for the BOJ to lower its negative rate as it can shield the impact on some struggling banks. Yet, others say a rate cut is now less likely as the move is a realization that the BOJ needs to help ease pressure on the sector, not add to it.
Gov. Haruhiko Kuroda has played down any implications for policy. The governor said last week that the interest payment facility is a prudential tool that has no impact on monetary policy decisions over stimulus. He said last month that the benefits of low interest rates outweigh the costs for the economy overall.
Many analysts say a further cut in the negative rate of minus 0.1% could become necessary if the yen strengthens sharply, though this isn’t their base scenario. Economists surveyed in October said the yen at 95 against the dollar would be the likely tipping point. The dollar was trading around ¥104.5 early Tuesday.
Miyanoya said the latest measure is so drastic that it’s comparable with subordinated loans the BOJ provided in 2009, during the global financial crisis, or its buying of stocks held by banks to ensure financial stability in 2002.
"This is an extremely bold step,” said Miyanoya, who left the central bank in 2018. "The facility clearly reflects the desire of the BOJ’s prudential department to help banks as their profitability has been squeezed considerably by the negative rate for quite some time.”
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