Kuroda Lagging Behind ECB's Negative Rates Shows Limited Options

  • ECB deposit rate now 40 basis points lower than Bank of Japan
  • Lenders say a lower rate would undermine Japan easing targets

Now that the European Central Bank has cut its deposit rate, while the Bank of Japan has held policy for more than a year, concerns are growing that Governor Haruhiko Kuroda has little room for maneuver.

The ECB lowered the rate it pays banks on their overnight reserves by 10 basis points on Thursday to minus 0.3 percent, boosted its quantitative easing plan to include regional debt and extended the policy until at least March 2017. The BOJ can’t cut its similar rate of 0.1 percent because that may lead to an insufficient pool of bonds it buys to expand the monetary base, said Mizuho Bank Ltd. and Totan Research Co. It may need to change its policy framework, they say.

“We’re starting to see a stark contrast now,” said Daisuke Karakama, the chief market economist at Mizuho in Tokyo. “By taking it slow on the QE expansion, the ECB still has room for further easing, but what’s left for the BOJ is to cut the deposit rate and that would mean an overhaul of its own regime. The BOJ might be near a deadlock.”

Policy options are running out as the central bank already owns 28.5 percent of Japan’s sovereign bond market, prompting dealers to voice concerns of declining liquidity. While the ECB’s overall package disappointed euro bears, ECB President Mario Draghi has still been more successful than Kuroda in weakening his local currency to fuel inflation, with the euro declining almost 8 percent against the yen this year.

Kuroda on Monday said the BOJ shouldn’t adopt negative interest rates. In October, he said the central bank isn’t considering cutting the rate on excess reserves. He also said last month that he doesn’t see any limits to policy, and policy makers can keep buying bonds until its price target is reached.

The central bank scrapped interest rates as its main policy tool in 2013 and instead set a target for the size of the monetary base. It kept its pledge unchanged last month to increase the base at an annual pace of 80 trillion yen ($649 billion), a policy that’s weakened the yen and helps boost the profits of the nation’s exporters.

“The ECB’s move to deepen negative deposit rates will revive debate about why the BOJ doesn’t reduce interest rates on excess reserves just like the ECB,” said Kenro Kawano, the chief bond strategist at Morgan Stanley MUFG Securities Co. in Tokyo. “The BOJ doesn’t want to do it because it will make it difficult to achieve the 80 trillion-yen expansion.”

Under the current unprecedented stimulus, the BOJ is buying Japanese government bonds from financial institutions, which are parking the proceeds from bond sales at the central bank to earn 0.1 percent. Lenders were the largest holders of JGBs and Treasury bills, accounting for 30 percent as of end-June, according to the Finance Ministry.

If banks no longer earn 10 basis points from excess reserves, they might stop selling JGBs in the BOJ’s operations because they’d want to keep the yield from those bonds, Morgan Stanley MUFG’s Kawano said.

Weakening Currency

The BOJ’s outstanding monetary base increased about 30 percent to 344 trillion yen at the end of November from a year ago. The average outstanding amount of excess reserves at the central bank for the period of Oct. 16 to Nov. 15 reached a record high 214.8 trillion yen.

“The negative yield policy is conducted primarily with the aim of weakening a currency and that’s what the ECB is eyeing,” said Izuru Kato, the chief economist at Totan Research in Tokyo. “You can’t say just because the ECB is doing it, the BOJ can too, because cutting the rate to negative will require a change in the monetary-base target.”

Economists are almost unanimous in forecasting that the central bank won’t meet the price target in its latest time frame of around six months through March 2017. The most recent reading for the BOJ’s core inflation gauge was minus 0.1 percent, far below the BOJ’s 2 percent goal.

Policy Outlook

Twenty-one of 41 economists surveyed forecast the bank will add stimulus by April 2016 while 19 don’t expect additional stimulus, according to the poll conducted from Nov. 13-17. Only four expected that the central bank will cut the excess reserve rate, while 17 said it would increase the pace of monetary-base expansion.

The central bank is mopping up about 90 percent of bonds issued to markets, helping cap gains in yields. The benchmark 10-year yield was at 0.33 percent on Monday, after slumping to a record low of 0.195 percent in January.

“If banks, which are major players in this framework, become reluctant when the excess reserve rate is cut, that risks disturbing the BOJ’s JGB buying operations and hampering a smooth monetary base expansion,” said Yuya Yamashita, a rates strategist in Tokyo at JPMorgan Chase & Co. “If the rate falls to negative, they may opt to hold JGBs to avoid eroding profits, provided yields are positive.”

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