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ECONOMY > Economic Policy

BOJ’s Kuroda hints at negative-rate bias

  • August 30, 2016
  • , Nikkei Asian Review , 3:00 a.m.
  • English Press

By Jun Iahikawa, Nikkei staff writer


TOKYO — While the Bank of Japan’s “comprehensive review” of its monetary easing remains a few weeks away, BOJ Gov. Haruhiko Kuroda provided an assessment of sorts last weekend.


The central bank’s negative-rate policy is working, Kuroda stressed in a speech Saturday at the U.S. Federal Reserve’s annual symposium in Jackson Hole, Wyoming.


Deeper and deeper


He produced a chart showing how Japanese government bond yields have fallen since the BOJ announced the policy in January, and indicated the possibility of taking the negative-rate policy further.


Removing the zero bound does not necessarily mean that central banks are able to cut the nominal interest rate to an arbitrarily negative level, the governor noted. At the same time, he argued that the BOJ’s current rate of minus 0.1% is still far from such a lower bound.


BNP Paribas’ Ryutaro Kono suspects that Kuroda gave a glimpse of the “direction” that the BOJ policy board will take in the late-September review. Citing a passage in his speech suggesting that the central bank sees negative interest rates as a more important downward driver of market rates than quantitative easing, Kono predicted that the main thrust of the BOJ’s easing will shift accordingly.


Kuroda “probably wants to keep deeper negative interest rates as a possible countermeasure to a rising yen,” Kono said.

The Financial Services Agency and others have expressed concern that forcing interest rates below zero will hurt banks’ earnings. Some financial institutions had even entertained the vague hope that the upcoming policy review would see the BOJ reverse course. But Kuroda appears to have dashed even that.


Tapering hopes dashed

Meanwhile, the BOJ governor gave no indication of the outlook for JGB purchases. At the current rate of 80 trillion yen ($782 billion) a year, the BOJ is expected in essence to run out of bonds to buy in a year or two. Yet Kuroda stressed that it still has “ample space for additional easing” in terms of quantity, quality — the types of assets purchased — and interest rates.


“If the BOJ is going to double down on negative interest rates, the blow to bank earnings will become too severe unless it reduces purchases of longer-dated JGBs at the same time,” said Izuru Kato of Totan Research.


A crash in bank stocks could diminish any benefits of the negative-rate policy. While some at the BOJ share such concerns, many remain opposed to tapering JGB purchases. This is why some BOJ watchers in the financial markets are now resigned to the prospect of the policy board only going as far as to recognize the issue in its review.


A “strong commitment” to achieving inflation on the part of central banks has an important influence on the price expectations of businesses and consumers, Kuroda stressed. The BOJ intends to keep its 2% inflation target. But the bank may stop mentioning two-year time frame initially set out, essentially retracting the timetable.


All about the yen


The lingering threat of a strong yen is what makes the BOJ want to keep negative interest rates handy. Amid renewed expectations of a U.S. interest rate hike by year’s end — thank Fed Chair Janet Yellen’s remarks at Jackson Hole for that — the Japanese currency has softened somewhat against the dollar. But an actual rate increase could destabilize financial markets and drive investors into the yen as a safe haven, as happened late last year. Hence the BOJ’s desire to have as many options for additional easing as possible.


Kuroda will deliver a speech in Tokyo next Monday, giving him another chance before the review to provide glimpses into still-obscure areas of his thinking on negative interest rates and JGB purchases.

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