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Few pluses yet from BOJ’s minus rate

Mar 17. 2016
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By Takeru Kise, Yosuke Higashida

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TOKYO - The Bank of Japan launched its negative interest rate policy (see below) one month ago Wednesday. While interest rates on a variety of loans, including business and home loans, have decreased, bank lending remains sluggish.
The central bank said it needs to wait to determine if the policy will stimulate the economy by encouraging companies to make capital investments and individuals to buy homes. However, it appears it will take some time until the effects can be ascertained.
 
“This is Japan’s first experience with a negative interest rate. I know there are a variety of opinions on the matter, so I want to explain it clearly,” Bank of Japan Gov. Haruhiko Kuroda said at a press conference Tuesday.
 
At a monetary policy meeting the same day, the central bank decided to maintain its monetary easing policies, including the negative interest rate. At its last meeting in January, the BOJ decided to introduce a negative interest rate. It gave no indications of the move until right before the announcement, hoping the unexpected news would have a major impact on financial markets.
 
Yet the surprise tactic partially backfired, as it generated concerns among some people that their bank deposits would be subject to negative interest rates. Many financial institutions have been hard-pressed to adapt their systems for transactions involving negative interest rates.
 
After its latest meeting, the BOJ announced that money reserve funds, investment trusts that function similar to deposit accounts, would not be subject to negative interest rates. Investors deposit capital they use for buying and selling stocks and bonds with these funds. In the background, security companies, which sell MRFs, had shown discontent that they would be subject to the negative rates.
 
The market reacted positively to this decision. “This puts things back on a realistic path,” one analyst said.
 
At present, the only clear effect of the negative interest rate policy has been a reduction in a variety of interest rates.
 
The megabanks have lowered the prime interest rate on 10-year fixed housing loans to 0.8 percent — the lowest ever. The interest rate applies to loans granted in March.
 
While the central bank hopes this will boost home purchases, “The effect hasn’t been as large as we thought it would be,” a spokesperson for a major housing company said. This is partially because a sharp increase in construction costs has pushed real estate prices higher.
 
The number of visitors to model rooms for new condominiums has reportedly not increased. With interest rates for home loans already very low, things seem unlikely to change soon, considering the price of properties.
 
“The negative interest rate will have a limited effect,” said Tadashi Matsuda of the Real Estate Economic Institute.
 
Interest rates for businesses have also declined, with the benchmark long-term prime rate dipping below 1 percent.
 
“The conditions banks are offering for financing are clearly better than last month. However, because orders may not increase, I can’t accept the offer,” the president of a casting company in Kawaguchi, Saitama Prefecture, said with a grumble.
 
Next move
 
In lending and deposit figures released by the BOJ, the average balance of outstanding loans for banks nationwide increased 2.2 percent last month from February 2015.
 
While this shows that lending increased somewhat from last year, the year-on-year increase for January, before the negative interest rate was introduced, was 2.3 percent, showing that the rate of growth actually contracted.
 
“The negative interest rate will have positive effects. I think it will take some time,” Kuroda said at the Tuesday press conference, declining to give a specific figure at which the BOJ would determine the effect of its policy.
 
As the BOJ did not implement any additional easing measures, the latest announcement had only a limited effect on stock prices and exchange rates. Instead, market interest is turning to what the BOJ’s next move might be.
 
Oil prices continue to be low and there are worries about a slowdown in the U.S. economy.
 
There has been a lull in the disorder that hit the market earlier this year. However, “uncertainty in the global economy is rising,” said Yuichi Kodama of Meiji Yasuda Life Insurance Co. “If the yen were to abruptly increase in value, the BOJ may decide to carry out additional easing by as early as April,” he said.
 
Negative interest rate policy
 
The Bank of Japan has placed an annual interest rate of minus 0.1 percent on some deposits from private financial institutions, essentially charging them a “service fee.” The BOJ hopes this will stimulate the economy by encouraging financial institutions to lend to businesses and individuals at even lower interest rates. Negative interest rates have been introduced overseas, such as by the European Central Bank and the Swiss National Bank.

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