BoJ’s local bank aid makes rates harder to cut, says ex-official


The Japanese central bank’s offer of 0.1% interest on some reserves at eligible local banks reflects its growing concern over the health of the regional banking sector, according to Atsushi Miyanoya, a former executive director who was in charge of the financial system at the central bank. (File pic BoJ HQ. - Reuters)

TOKYO: The Bank of Japan (BoJ) is now even more unlikely to lower its negative interest rate following a move to cushion its impact on regional banks, according to a former BoJ official.

The Japanese central bank’s offer of 0.1% interest on some reserves at eligible local banks reflects its growing concern over the health of the regional banking sector, according to Atsushi Miyanoya, a former executive director who was in charge of the financial system at the central bank.

“Theoretically, monetary policy is independent from prudential policy, ” said Miyanoya, in an interview last week.

“But diving deeper into negative rates is probably difficult after this, ” the former central bank official said.

To gain eligibility for the interest payments, regional banks must make decisions on merging or show they have improved their profitability.

The move shows intensifying concern at the BoJ over the state of regional banks and the possible risks they present for the financial system.

The pandemic has exacerbated their difficulties as profits erode amid continued low rates and rapid population decline outside Japan’s big cities.

Private economists are split over the impact of the assistance on policy.

Some have said that it makes it easier for the Bank of Japan to lower its negative rate as it can shield the impact on some struggling banks.

Yet, others say a rate cut is now less likely as the move is a realization that the BoJ needs to help ease pressure on the sector, not add to it.

Bank of Japan Governor Haruhiko Kuroda has played down any implications for policy.

The central bank governor said last week that the interest payment facility is a prudential tool that has no impact on monetary policy decisions over stimulus.

He said last month that the benefits of low interest rates outweigh the costs for the economy overall.

Many analysts say a further cut in the negative rate of -0.1% could become necessary if the yen strengthens sharply, though this isn’t their base scenario.

Economists surveyed by Bloomberg in October said the yen at 95 against the dollar would be the likely tipping point.

The US dollar was trading around 104.5 yen early yesterday.

Miyanoya said the latest measure is so drastic that it’s comparable with subordinated loans the BOJ provided in 2009, during the global financial crisis, or its buying of stocks held by banks to ensure financial stability in 2002.

“This is an extremely bold step, ” said Miyanoya, who left the central bank in 2018.

“The facility clearly reflects the desire of the BoJ’s prudential department to help banks as their profitability has been squeezed considerably by the negative rate for quite some time.”— Bloomberg

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