MNI INSIGHT: New BOJ Facility Could Push Overnight Rate Higher

The Bank of Japan's new special deposit facility could eventually put upward pressure on the benchmark overnight rate although it is dependent on how aggressively regional banks cut costs and consolidate to obtain the enhanced deposit rate, MNI understands.

If the new facility impinges on the BOJ's ability to maintain the short-term rate at -0.1%, policymakers will lower the Macro Add-on Balance that the zero rate is applied on and raise the Policy-Rate Balance that attracts the negative interest rate.

The new facility, which will pay an additional 0.1% under certain conditions, has been brought in as a macro-prudential measure and not as monetary policy -- but the BOJ is aware of the potential implication on both monetary policy and daily open market operations.

In theory, if all regional banks reform sufficiently to attract the additional 0.1% interest payment, the overnight call loan rate would rise from -0.1%, moving toward zero percent or higher, effectively raising the lower end of the corridor system. However, in practice, it is unlikely that the BOJ's negative rate will disappear anytime soon as some banks will still lend money at below zero.

Although accepting the overnight rate could move higher, MNI understands BOJ will make best efforts to ensure it doesn't so as not to give rise to speculation that its abandoning or reversing its ultra-easy monetary policy stance which could trigger a rise in the yen, with the adjustments made through adjustments to balance requirements.

BOJ CORRIDOR

An increase in the lower-end of the corridor could see the spread change, with the entire path moving from a range of -0.1% to +0.3% to 0.0% to +0.3% (the basic loan rate), increasing pressure on the BOJ to consider raising the short-term policy rate.

Under the corridor system, the unsecured overnight call loan rate – the BOJ's policy interest rate – continues moving in a range of -0.1% to zero percent, within the current corridor system between -0.1% and +0.3%.

The BOJ will set a limit to the amount of excess reserve balances subject to special remuneration, with the aim of ensuring appropriate operation of the SDF and conducting money market operations smoothly.