BOJ’s Negative Interest Rate Expected to have Major Influence on Japan’s Banks

Japan’s deposit-takers understand that if depositors are confronted with zero, or worse, negative nominal rates, cash can easily be withdrawn from the banks and either spent or invested in better yielding instruments, both of which would appeal to Japan’s policymakers, or hoarded at home.

The Japanese yen – despite the decision by the Bank of Japan to implement a negative interest rate policy just over a week ago – rallied strongly in overnight trade, bolstering the growing view among markets that central bank policy is losing its potency. Individual members are not identified in the release.

Given the sheer size of U.S. treasuries globally, negative rate would have much bigger implications than that of European Central Bank and BOJ.

Additionally, if Japan’s depositors – and indeed its banks which will want to avoid the BOJ’s soon-to-be-imposed negative rate – seek higher yielding instruments, their options at home are limited with domestic yields so low.

“Japan’s market is getting hit across the board amid the global selloff, and bank shares are being hurt by concerns about the BOJ’s adoption of negative rates”, said Takashi Miura, a Tokyo-based analyst at Credit Suisse Group AG. “I fear that it gives the impression to markets that monetary policy has reached its limits”, argued a member.

At the same time, the move would make it more hard to continue with the central bank’s Yen80-trillion-a-year asset purchases, which had been the BOJ’s main policy instrument for easing until the January meeting.

We can expect a crisis down the line and equity sell-offs, however, we don’t expect FED to introduce negative rates.

The sharp division may add to pressure on Prime Minister Shinzo Abe’s administration to find potential Kuroda allies to replace board member Sayuri Shirai, whose term will end March, and Koji Ishida, who will retire in June. Monetary easing is one of the main pillars of the prime minister’s policy package, known as Abenomics, that aims to defeat deflation and generate 2% inflation. But Mr. Honda said that wasn’t reassuring.

Clearly, with a number of central banks now mulling the efficacy of negative interest rates, the topic is garnering increasing comment.

The policy members briefly summarized their opinions from the meeting and submitted them to Mr. Kuroda.

According to the minutes, there was a lot of dissent in the meeting.