The surprise decision from the Bank of Japan (BOJ) to adopt a negative interest rate policy may not be anywhere as potent as BOJ governor Haruhiko Kuroda and others believe.
Kuroda yesterday proclaimed it to be “the most powerful monetary policy framework in the history of modern central banking”.
According to the Nikkei Asian Review, negative interest rates will only be applied to a maximum of 30 trillion yen of financial institutions’ current-account deposits placed with the bank.
Based on its analysis, the Nikkei believes negative interest rates will apply to around a tenth of total current account balances held with the BOJ, with remaining balances still attracting an interest rate of 0% or 0.1%.
Here’s a snippet from the report, detailing what balances will attract the three-tiered interest rate policy announced last Friday.
Current-account funds are expected to total 260 trillion yen in February, 210 trillion yen of which will earn interest at a 0.1% rate.
Of the remainder, an initial 10 trillion yen will be subject to the negative rate, while 40 trillion yen will earn zero interest. While the total balance is expected to rise at an annual pace of 80 trillion yen, the majority of this growth will occur within the zero-interest tier.
Based on the Nikkei’s analysis, the potency, nor the financial penalty on banks which decide not to lend out the proceeds from the BOJ’s 80 trillion per annum QQE program, may be far less effective in helping to spur on economic growth.
Despite this, the BOJ remains unperturbed, suggesting that its new monetary easing tool will spur banks to lend and invest.
And, if that fails to materialise, as a growing chorus of analysts suggest, the bank will ease policy even further, something Kuroda touched upon yesterday when he suggested that “there is no limit to measures for monetary easing”.
While a slim majority on the BOJ policy board believe negative interest rates will work – remembering that members split 5-4 in voting for the proposal – from the reaction seen in recent days, it appears that many in markets don’t agree.
While the Japanese government bond (JGB) curve now trades with negative interest rates out to nine years, something that implies ultra easy monetary conditions, the Japanese yen is now stronger, and the Nikkei 225 weaker, than when the BOJ announced its shock decision Friday afternoon last week.
You can read more from the Nikkei Asian Review here.
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