The Bank of Japan’s decision to introduce a negative interest rate policy last week may have surprised the markets, but it’s far from clear whether it will have the effects explained by Gov. Haruhiko Kuroda of encouraing consumption and investment. Resorting to the policy that Japan has never experienced — despite possible side effects and negative consequences — may be yet another signal of the limitations of the BOJ’s “unprecedented” monetary easing operations that Kuroda has pursued since 2013 as a core part of the Abe administration’s bid to bust deflation.
The decision will impose a minus 0.1 percent interest rate on part of the commercial banks’ deposits in their current accounts in the central bank beginning in mid-February. The idea is to prod the banks to lend more by charging them fees for keeping their money deposited in the central bank. The move is also expected to make the yen lower against other currencies.
With its target of achieving an annual 2 percent inflation to end deflation that gripped Japan since the 1990s, the BOJ under Kuroda has engaged in massive asset purchases to inject more money in the economy. But while the monetary stimulus pushed down the yen sharply lower against the dollar, boosting the profits of major companies and shoring up share prices, it has not resulted in significant increases in bank lending. Commercial banks to which the BOJ provided more funds by purchasing the government bonds they held have in turn deposited much of the funds in their accounts at the central bank — instead of lending more to consumers and businesses — due to the limited loan appetite amid the slow growth of the economy and population decline.
The impact of the BOJ’s latest decision on banks’ lending behavior is unclear. While banks will sustain losses on money that is kept in their BOJ accounts, it’s uncertain whether that factor alone will make people and businesses more willing to borrow. Since the negative interest rates can financially hurt the banks by depriving them of part of the interest gains on their BOJ deposits, there are concerns that the banks may try to offset the added cost by raising the interest rates on their loans to businesses and consumers — the opposite result of what the new BOJ policy is intended to have. In the face of a steep fall in long-term interest rates following the BOJ decision, on Monday several banks cut interest rates on time deposits.
The effects of Kuroda’s surprise move — days after he denied weighing the option — may be largely symbolic, given that the minus interest rate applies to only a portion of the bank’s deposits in the BOJ. But the central bank said it will “cut the interest rate further into negative territory if it’s judged to be necessary.”
The BOJ’s move came on the heels of worldwide stock market turbulence since the start of the year, triggered by persistent fears of slowdown in China and other threats to the global economy. Share prices in the Tokyo Stock Exchange surged for two days in a row after the new policy was announced. But the 5-4 split decision among the BOJ’s nine policy board members suggests that doubts about the effects of the new policy exist within the central bank.
As he announced the new policy, Kuroda revised the BOJ’s inflation outlook downward and again pushed back the target for achieving 2 percent inflation from “around the latter half of fiscal 2016” to “early fiscal 2017.” Consumer price index in December rose a scant 0.1 percent from a year earlier. The average CPI in 2015 rose 0.5 percent for the third year-on-year increase, but was much slower than the 2014 average of 2.6 percent. If the effects of the April 2014 consumption tax hike are discounted, 2015 saw a zero increase in consumer prices following a 1.1 percent gain the previous year. The disparity with the BOJ’s goal appears to be growing.
Even though the slowing price increases are largely attributed to the plunge in crude oil prices, the time seems ripe for the BOJ to review whether its nearly three-year monetary stimulus and the inflation targeting — supposedly meant to encourage consumption and investment by raising people’s inflationary expectations — are having the intended effects. Kuroda said the central bank is ready to take further steps, including expanding its asset purchases, to put an end to deflation. But the latest BOJ step appears to point to the limits of what the central bank alone can do to achieve that.