BoJ scram­bles to find pos­i­tives in neg­a­tive rates

The Pak Banker - - COMPANIES/BOSS -

Bank of Ja­pan (BOJ) of­fi­cials have been scur­ry­ing to com­mer­cial banks to ex­plain and apol­o­gize for its sur­prise adop­tion of neg­a­tive in­ter­est rates in Jan­uary, while Prime Min­is­ter Shinzo Abe has dis­tanced him­self from a de­ci­sion that is prov­ing un­pop­u­lar with the pub­lic.

Some of­fi­cials close to the premier say it could cause a rift in his once close re­la­tion­ship with BOJ Gov­er­nor Haruhiko Kuroda, whose rad­i­cal stim­u­lus mea­sures have so far failed to lift Ja­pan clear of two decades of de­fla­tion and stag­na­tion. A govern­ment press re­la­tions of­fi­cial said there was noth­ing to add be­yond re­marks made pub­licly by Chief Cab­i­net Sec­re­tary Yoshi­hide Suga that no such rift ex­ists. A BOJ spokesman de­clined to com­ment.

With the econ­omy shrink­ing again and prices flat, Abe has al­ready an­nounced he will set up a panel to con­sider fresh bud­get spend­ing to pro­vide the stim­u­lus that mon­e­tary pol­icy has strug­gled to achieve. The con­tro­versy over the neg­a­tive rates move, which un­like his pre­vi­ous eye-catch­ing pol­icy steps was not wel­comed by Ja­pan's stock mar­ket, comes even as Kuroda is on the verge of gain­ing greater con­trol of the bank's nine-mem­ber board. Two skep­tics of his stim­u­lus pro­gram are step­ping down in the com­ing months.

The di­min­ish­ing re­turns from his pre­ferred modus operandi of mar­ket-shock­ing mea­sures will leave him lit­tle op­tion but to re­vert to the drip-feed eas­ing he de­rided in his pre­de­ces­sor Masaaki Shi­rakawa if in­fla­tion fails to pick up, some an­a­lysts say. "Given the con­fu­sion caused by the Jan­uary move, I don't think the BOJ will be able to cut rates again for the time be­ing," said Hideo Ku­mano, a for­mer BOJ of­fi­cial who is now chief econ­o­mist at Dai-ichi Life Re­search In­sti­tute.

"The BOJ may in­stead ex­pand as­set pur­chases in small in­stall­ments. That would be re­turn­ing to the in­cre­men­tal ap­proach of eas­ing Kuroda dis­missed in the past as in­ef­fec­tive."

Man­dated by Abe to trans­form the risk-shy BOJ, Kuroda de­lighted mar­kets and si­lenced skep­tics within the bank by de­ploy­ing a mas­sive money-print­ing pro­gram, dubbed "quan­ti­ta­tive and qual­i­ta­tive eas­ing" (QQE), in April 2013.

The Tokyo stock mar­ket soared and the yen tum­bled, giv­ing ex­porters a boost, and Ja­panese growth and in­fla­tion reg­is­tered a pulse. He struck again in Oc­to­ber 2014 with a big ex­pan­sion of QQE, though the mar­ket boost was smaller, price rises were al­ready mod­er­at­ing and the econ­omy was tak­ing a step back for ev­ery step for­ward. But the late-Jan­uary rates de­ci­sion failed to re­verse a rise in risk-aver­sion that was hit­ting stocks and forc­ing up the yen, tra­di­tion­ally a safe haven in times of mar­ket stress.

Like Shi­rakawa, who faced fre­quent grilling by law­mak­ers for do­ing too lit­tle too late to beat de­fla­tion, Kuroda is now sum­moned to par­lia­ment al­most daily. Op­po­si­tion law­mak­ers brand neg­a­tive rates a pol­icy fail­ure that con­fused, rather than calmed, jit­tery fi­nan­cial mar­kets.

Tabloids warned peo­ple to de­fend their de­posits from the risk of a bank run, while talk shows ran fea­tures on the threat to fam­ily sav­ings. Abe, who used to praise Kuroda's BOJ for tak­ing bold steps to erad­i­cate de­fla­tion, dis­tanced him­self from the pol­icy, telling par­lia­ment on March 7 that the de­ci­sion was "of the bank's own mak­ing". Masahiko Shibayama, an ad­viser to Abe, said there had been "quite a bit of con­fu­sion" in mar­kets. "I hope the BOJ calmly analy­ses the im­pact neg­a­tive in­ter­est rates have had, which should feed into their de­ci­sion about the next steps to take," he told Reuters this month, sig­nal­ing the ad­min­is­tra­tion's dis­taste for fur­ther cuts.

Sources told Reuters the BOJ was set to dis­cuss ex­empt­ing some funds from the neg­a­tive rates, af­ter the se­cu­ri­ties in­dus­try warned that in­vest­ment money would be driven into bank de­posits, which would not help Abe's hopes of get­ting cash put to more pro­duc­tive use to boost the econ­omy. Ex­cept for an elite hand­ful, even BOJ of­fi­cials were left in the dark about the Jan­uary de­ci­sion. Many of­fi­cials are now be­ing kept busy de­fend­ing the pol­icy to law­mak­ers and pri­vate banks fu­ri­ous that Kuroda de­ployed the "shock and awe" tac­tic just days af­ter deny­ing such a move was a pos­si­bil­ity.

Top BOJ ex­ec­u­tives are vis­it­ing the big banks to brief them on neg­a­tive rates, a re­ver­sal of the nor­mal course of events, which would usu­ally see pri­vate bankers vis­it­ing BOJ head­quar­ters, say of­fi­cials with di­rect knowl­edge of the mat­ter. Out­side of Tokyo, BOJ branch man­agers are hold­ing meet­ings with re­gional banks to calm ex­ec­u­tives an­gered by the im­pact that neg­a­tive rates are hav­ing on their al­ready slim lend­ing mar­gins.

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