Economists are betting on Japanese central bankers loosening policy further next month, but some have warned its policy of negative interest rates is already creating negative side effects.
The Bank of Japan (BoJ) kept its stimulus measures unchanged this morning, keeping the annual rate of its so-called quantitative and qualitative easing (QQE) at ¥ 80 trillion (£500bn) and the interest paid on excess reserves (IOER) held by banks at minus 0.1 per cent.
In its policy statement the BoJ erred on the side of caution. It said:
Due attention still needs to be paid to a risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected.
“The Bank of Japan did not announce additional monetary easing at today’s meeting, but dropped some strong hints that it believes more stimulus will eventually be needed. We now expect policymakers to step up the pace of asset purchases and lower the interest rate on excess reserves at the April meeting,” said Marcel Thieliant from Capital Economics.
“We expect an increase of purchases in the BoJ’s Quantitative and Qualitative Easing programme (QQE) by ¥20 trillion a year to 100 trillion. We see the BoJ with 3 other choices: cut the policy IOER once more, a combination of a cut with some increased QQE and no easing at all,” said Daiju Aoki from UBS.
While negative interest rates have been criticised for squeezing banks’ profit margins, other problems are being highlighted.
“The effect of negative interest rates on the currency in January was the opposite of that intended: the central bank’s aggressive adoption of negative deposit rates merely fuelled global angst at a critical juncture, driving repatriation flows into Japan and pushing up the currency,” said economist Freya Beamish from Lombard Street Research.
“The negative interest rate policy has generated a host of side-effects. These range from teething troubles such as models unequipped to deal with negative signs to serious issues such as the closure of money market funds.”