Key Points of Today’s Policy Decision
* The Introduction of "Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate"
- The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank. It will cut the interest rate further into negative territory if judged as necessary.
- The Bank will introduce a multiple-tier system which some central banks in Europe (e.g. the Swiss National Bank) have put in place. Specifically, it will adopt a three-tier system in which the outstanding balance of each financial institution’s current account at the Bank will be divided into three tiers, to each of which a positive interest rate, a zero interest rate, or a negative interest rate will be applied, respectively.
* "QQE with a Negative Interest Rate" is designed to enable the Bank to pursue additional monetary easing in terms of three dimensions, combining a negative interest rate with quantity and quality.
- The Bank will lower the short end of the yield curve and will exert further downward pressure on interest rates across the entire yield curve through a combination of a negative interest rate and large-scale purchases of JGBs.
- The Bank will achieve the price stability target of 2 percent at the earliest possible time by making full use of possible measures in terms of the three dimensions.
Q1. Will the Bank continue to purchase Japanese government bonds (JGBs) after the introduction of a negative interest rate?
A. Under "QQE with a Negative Interest Rate," the Bank will pursue monetary easing by making full use of possible measures in terms of three dimensions, combining quantity, quality, and interest rate. It will lower the short end of the yield curve by slashing its deposit rate on current accounts into negative territory and will exert further downward pressure on interest rates across the entire yield curve, in combination with large-scale purchases of JGBs.
Q2. Will a negative interest rate make it difficult for the Bank to continue purchasing JGBs?
A. The Bank can continue purchasing JGBs because costs of negative interest will be passed on to its purchasing prices of JGBs (or yields on JGBs purchased by the Bank) so that the prices will be higher (or the yields will be lower). The European Central Bank has been implementing a combination of its Asset Purchase Program and a negative deposit facility rate. The Bank will conduct JGB purchases while paying due attention to the impact of a negative interest rate on the JGB market.
Q3. Will a negative interest rate cause a decrease in financial institutions’ earnings?
A. When central banks aim at boosting the real economy through monetary easing measures, these measures can negatively affect the earnings of financial institutions which function as financial intermediaries. In deciding the introduction of a negative interest rate at the Monetary Policy Meeting held today, the Bank also decided to adopt a three-tier system in which a positive interest rate or a zero interest rate will be applied to current account balances up to certain thresholds in order to make sure that financial institutions’ functions as financial intermediaries would not be impaired due to undue decreases in financial institutions’ earnings. It should be noted that overcoming deflation as soon as possible and exiting from the low interest-rate environment lasting for two decades is essential for improving the business conditions for the financial industry.
Q4. Will a negative interest rate be effective under the three-tier system, given that the negative rate will be applied partially?
A. Transaction prices in financial markets (e.g. interest rates, stock prices, and exchange rates) are determined by marginal losses or gains made in a new transaction. Although a negative interest rate is not applied to the total outstanding balances of current accounts, costs incurred with an increase in the current account balance brought by a new transaction will be minus 0.1 percent if it is applied to a marginal increase in the current account balance. Interest rates and asset prices will be determined in financial markets based on that premise.
Q5. How far into negative territory can the interest rate be moved?
A. With regard to potential problems associated with negative interest rates, the following can be mentioned: (1) if the decrease in financial institutions’ earnings due to negative interest rates become sizable, it could impair their functions as financial intermediaries; and (2) if financial institutions reduce their outstanding balances of the central bank’s current accounts with which a negative interest rate is charged and significantly increase their cash holdings which yield zero interest, the effects of negative interest rates will be lessened.
The Bank of Japan’s framework is designed to address these potential problems. With regard to (1), the Bank has adopted a three-tier system in order to mitigate a concern over undue impact on financial institutions’ earnings. With regard to (2), if a financial institution increases its cash holdings significantly, the Bank will deduct an increase in its cash holdings from the zero interest-rate tiers of current account balance. Thus, a negative interest rate will be charged on the increase in its cash holdings. Similar multiple-tier systems are adopted in countries where the size of negative interest rates is relatively large, including Switzerland (minus 0.75 percent), Sweden (minus 1.1 percent), and Denmark (minus 0.65 percent).
Q6. Given that the interest rate on current accounts at the Bank becomes negative, don’t you think financial institutions will stop using the Fund-Provisioning Measure to Stimulate Bank Lending, the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth, and the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas affected by the Great East Japan Earthquake?
A. The Bank judges that these measures are playing an important role and it is not desirable that a negative interest rate on current accounts at the Bank would provide a disincentive for financial institutions to use these facilities. On this basis, the Bank decided to cut its lending rates for these facilities to zero percent and also to allow the amounts outstanding of the Bank’s provision of credit through these facilities to be included in the tier of current account balances to which a zero interest rate will be applied. Therefore, while the outstanding balances of current accounts which financial institutions hold at the Bank will increase due to the use of these facilities, these financial institutions will not incur a negative margin and thus will not be discouraged to use them.
Q7. Please explain why the Bank will adjust the tiers of current account balances, to which a zero interest rate will be applied, at an appropriate timing.
A. As the monetary base will grow at an annual pace of about 80 trillion yen in line with the Bank’s current guideline for money market operations, the outstanding balances of current accounts at the Bank will increase on an aggregate basis. In this situation, the Bank will accordingly increase the tiers of financial institutions’ balances of current accounts to which zero interest rates will be applied at an appropriate timing so that the balances to which a negative interest rate will be applied will remain at adequate levels.
— With assistance by Iain McDonald