Japan's Negative Rates Divide Economists

Yen Set For A Shaky Week As Negative Rates Take Hold
  • Nine in survey say policy was wrong, eight say it was right
  • Financial market would've been worse without it, Kuroda says

After two months of negative interest rates and market turmoil in Japan, economists are split on whether the central bank made the right decision.

QuickTake Negative Rates

Nine of 17 economists surveyed by Bloomberg said the Bank of Japan was wrong to adopt the new policy, while eight said it was right. The BOJ announced the measure on Jan. 29 and put it into practice on Feb. 16, when it started charging financial institutions on some of their reserve cash.

The BOJ cautions that time will tell, and board member Yutaka Harada said this week that it is still too early to assess the policy’s impact. Many investors aren’t waiting, and data available now show inflation is yet to pickup, yields on about 70 percent of Japanese government bonds are below zero, money market funds have stopped accepting money, and the policy has drawn the ire of Japan’s biggest bank.

“The negative-rate policy has attracted strong criticism, not only from financial institutions whose profits are squeezed but also from normal people," Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo, wrote in the survey. “It’s difficult to see any expansion of negative rates in the near future, unless the situation changes suddenly.”

Seven of those who judged it was wrong to adopt negative rates said it won’t boost inflation and growth, according to the survey conducted April 8-13. One said it may help boost growth and prices, but other policies would have been better. One warned it may undermine productivity.

More Options

Among those backing the BOJ’s decision, five said that combined with quantitative and qualitative easing, the rate will help boost inflation and growth. One said it may not do this, but has curbed gains in the yen.

Introducing the negative rate has given the BOJ more policy options, helped to lower long-term borrowing costs for non-financial companies, and also restrained the appreciation of the currency, wrote Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo. “The easing also caused the yield curve to flatten aggressively," he said.

Governor Haruhiko Kuroda said the nation’s financial markets would have been in worse shape if the BOJ hadn’t adopted the negative rate.

“I really don’t think that the introduction of the negative interest rate backfired or caused the yen to appreciate and stock markets to decline in Japan,” Kuroda said during a question and answer session at Columbia University in New York.

Corporate Sentiment

Corporate sentiment and the economic outlook of individuals has deteriorated since Jan. 29. While interest rates on new loans are at record lows, which should encourage people to take out loans, lending growth slowed in both February and March.

The yen has strengthened about 11 percent against the dollar since the decision, the benchmark Topix stock gauge has fallen 5 percent while the banking index has plunged 15 percent.

Marcel Thieliant of Capital Economics in Singapore wrote that the impact of negative rates on the yen has simply been overwhelmed by other factors, in particular the sell-off in global stock markets at the start of the year.

Norddeutsche Landesbank’s Stefan Grosse said that much of the error was in surprising people and that the BOJ should have done more to prepare markets and banks.

“Both households and businesses have become skeptical about the effectiveness of policy measures to address the current economic problems,” Nobuyuki Hirano, president of Mitsubishi UFJ Financial Group Inc., said in a speech in Tokyo on Thursday. There’s “no guarantee” that negative rates will encourage companies to increase capital spending because low borrowing costs and deflation have been “business as usual for over a decade,” he said.

The BOJ policy board will next meet on April 27-28, when they decide policy and update forecasts for inflation and the economy.

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