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MNI (London)
--BOJ Not Ruled Out Deepening Negative Rates, But Pros/Cons To Be Weighed
By Hiroshi Inoue
     TOKYO (MNI) - Lowering real interest rates will be the Bank of Japan's main
policy option if there is a need for further easing, with Bank officials
unconvinced as to the benefit of extending quantitative easing, MNI understands.
     BOJ officials maintain the view that Japan's economic activity and prices
have picked up as a result of lower real interest rates, and should downside
risks increase prompting further action, that should remain the preferred way
forward, enabling firms to raise funding at a lower cost.
     Experience has taught the BOJ that quantitative easing hasn't stimulated
economic activity and boosted the inflation rate, with officials still uncertain
how increasing the money supply has boosted inflation.
     It is unlikely that the BOJ returns to QE, as they feel the transmission
mechanism is unverified, including exactly what the impact is on the economy and
inflation rates.
     But the BOJ will continue expanding the monetary base until the
year-on-year rate of increase in the observed CPI (excluding fresh food)
exceeds2% and stays above the target in a stable manner under their
"overshooting commitment".
     There is some concern amongst BOJ officials that lowering real interest
rates may also have limited impact, as rates have already been at very low
levels for a prolonged period and both firms and households are now less
sensitive to moves.
     However, they feel lengthening forward guidance on easy policy from "for an
extended period of time" policy is another option available if the need arises.
     Another option, not yet entirely ruled out by the Bank, is to further lower
the negative short-term interest rate target from the current -0.1%. However,
officials and board members are acutely aware of the debate around the
side-effects -- such as lowering profitability at commercial banks -- and will
carefully weigh the pros and cons before a further cut.
     BOJ officials believe an increase in the monetary base, along with central
bank lending to banks at negative rates, can help mitigate some side effects of
deepening negative nominal rates. But the officials are concerned that the loan
rates for commercial banks could be seen as a subsidy to them and eventually
lead to calls for the banks to pass on negative rates to customers.
     Those officials are also concerned over the risk that increasing the
monetary base will have greater downward pressure on nominal interest rates than
when increasing the monetary base back in 2014.
     Keeping all options open, BOJ Governor Haruhiko Kuroda has cited lowering
the short- and long-term interest rates, expanding the asset purchases and
accelerating the expansion of monetary base as additional policy measures
available under the yield curve control policy.
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email:
--MNI London Bureau; tel: +44 203-586-2225; email:
MNI London Bureau | +44 203-865-3812 |