Gov. Kuroda’s rhetoric takes an important turn as he recognize’s negative rates’ baleful effect on banks.
The Bank of Japan’s negative interest rate policy is adding a new ingredient: a dash of remorse.
Two weeks before a much-anticipated monetary-policy meeting, BOJ Governor Haruhiko Kuroda acknowledged that subzero policy rates have had an adverse impact on the profitability of Japanese financial institutions—and, more important, said the BOJ should consider these effects when conducting policy.
That’s an important turn in the BOJ’s negative-rate rhetoric. While Mr. Kuroda has long acknowledged negative rates could potentially harm banks, he has been dismissive of the effects—saying they would be outweighed by a faster-growing economy. In a March speech, Mr. Kuroda said Japan’s banks were strong and it was “entirely inconceivable” that this policy would get in the way of “financial intermediation” In June he said “there is no evidence, whatsoever” that negative rates have had “any major adverse effects on the profitability of financial institutions or undermined their financial intermediation functions.”
The European Central Bank is surely watching closely for lessons learned, but Mr. Kuroda figures the effects may be somewhat unique to Japan. Japanese banks’ larger stock of deposits relative to loans, combined with a shrinking spread between deposit and lending rates, make more vulnerable to negative-rate profit damage than banks in other parts of the world.
The International Monetary Fund estimated last month that to offset the negative-rate policy’s impact on their net interest income, Japanese banks’ domestic loans need to grow 4% a year—twice the 2% pace of domestic bank lending as of June.
Acknowledging the downsides of negative rates doesn’t mean the policy is going away. Mr. Kuroda said there is “ample space” to go deeper into negative-rate territory. He could be laying the groundwork for more substantial goodies in the form of expanded lending facilities for banks in case the rates do go more negative.
Either way, there is pressure to do more, given stubbornly low inflation expectations. This month yields on Japanese government bonds have surged, unwinding some of what Mr. Kuroda in his speech called the “extremely powerful” effects the policy had in the first place. Lower bond yields should reflect reduced funding costs for households and businesses.
Mr. Kuroda’s speech was made in the context of the BOJ’s self-imposed “comprehensive assessment,” a sort of existential examination of all the extreme and experimental moves it has made in recent years. The result could be a major change in policy direction or it could be more of the same. It’s encouraging that the BOJ is considering the effects of its actions.
By Anjani Trivedi