BOJ Stimulus Never Less Effective as Cash Idles, Indicator Shows

BOJ Surprise: Kuroda's Act of Market Defiance?
  • Money multiplier plunges to the lowest in data to 2003
  • Yotai gap widens to 207.6 trillion yen, near a record

A benchmark gauge shows the Bank of Japan’s stimulus has never been less effective and some bankers say negative interest rates have only made it harder to put cash to work in the economy.

Consider the money multiplier. The measure of how much financial activity is spurred by an addition of cash by the central bank sank to the lowest on record last month, in data back to 2003. That’s even as BOJ Governor Haruhiko Kuroda’s bond buying has swelled the monetary base by around 170 percent since March 2013. Much of the injected funds are sitting idle, with bank deposits exceeding loans by close to an all-time high.

“The reason the money multiplier is falling like a stone is that, even with quantitative easing and negative rates, demand for lending from companies and households remains weak,” said Shuichi Ohsaki, the chief rates strategist at Bank of America Merrill Lynch in Tokyo. “In a period of low growth, it’s hard to force an increase in that demand.”

Outside the Box

The impasse suggests the BOJ needs to think even further outside the box. The central bank held off on expanding monetary stimulus Thursday, as policy makers opted to take more time to assess the impact of negative interest rates, propelling a surge in the yen. Governor Kuroda said this month he won’t hesitate to expand easing if necessary, describing current stimulus as already the most powerful in modern history.

Japan’s consumer prices dropped in March by the most since April 2013, the month that Kuroda launched his quantitative-and-qualitative-easing program. The measure the central bank uses to track progress toward its 2 percent target slid 0.3 percent from a year earlier, after languishing near zero for more than a year.

Lending growth slowed to the weakest pace in three years in March at 2 percent, according to BOJ data. The difference between bank deposits and loans, known in Japanese as the yotai gap, widened to 207.6 trillion yen ($1.9 trillion), approaching the record 209.9 trillion yen reached in May 2015.

Those deposits may in fact under-represent the amount of money households are hoarding, after sales of home safes soared this year.

The president of Japan’s biggest bank is among a chorus of top executives who have criticized the BOJ’s Jan. 29 decision to charge financial institutions when they park some funds at the monetary authority. Mitsubishi UFJ Financial Group Inc.’s Nobuyuki Hirano said in a speech in Tokyo this month that the policy has contributed to anxiety among households and companies, and prolonging it may weaken financial institutions.

Surprising Some

The decision by the monetary authority on Thursday came as a surprise to the slight majority of economists surveyed by Bloomberg who had projected some form of action from the central bank.

Kuroda has said the effects of negative rate policy will take time to filter through the economy, while he doesn’t expect it will squeeze lenders’ profits excessively or result in negative deposit rates for retail banking customers. He has indicated there is room to lower the key rate to minus 0.5 percent from the current minus 0.1 percent and that the nation’s financial markets would have been in worse shape if the BOJ had not introduced the program.

Falling Yields

Japan’s sovereign debt yields have sunk to records across maturities this year, with about 70 percent of the securities now yielding less than zero. The benchmark 10-year note yielded minus 0.095 percent in Tokyo Thursday, from an all-time-low minus 0.135 percent reached in March and again last week.

Lower rates have yet to translate into increased lending. The money multiplier, calculated by dividing the total amount of funds in the economy by the monetary base, sank to a record 3.35 last month. The ratio was 8.27 before Kuroda kicked off his easing program in April 2013.

Japan Inc. remains wary of boosting investment, given slow growth and the likelihood that the market for goods and services will contract as the population ages and declines. The corporate cash pile swelled to a record 246 trillion yen as of the end of last year, according to the central bank.

“The natural explanation for why lending hasn’t grown is that companies can’t expect a decent profit from expanded balance sheets and increased capital spending,” said Makoto Yamashita, a strategist for Japanese interest rates at Deutsche Bank AG’s securities unit in Tokyo. “It’s not because of the level of interest rates.”

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