The Bank of Japan (BOJ) is not running out of policy options in its attempt to reinvigorate the economy, a senior Japanese government official said yesterday, days after the central bank surprised investors by adopting a negative interest-rate strategy to spur banks to lend more.
“I don’t think that’s the case,” Japanese Deputy Chief Cabinet Secretary Hiroshige Seko said when asked in an interview whether bank policymaking was nearing its limits.
“There are other central banks that have introduced lower negative interest rates,” he said. “This is not the last resort.”
Bank Governor Haruhiko Kuroda’s decision to penalize a portion of banks’ reserves held at the central bank is a strategy once shunned by central bankers, but which has recently been adopted by Sweden, Denmark, Switzerland and the European Central Bank.
The strategy is to complement the record asset-purchase program that has expanded the central bank’s balance sheet to about three-quarters the size of the economy.
The bank’s policies have also weakened the yen by more than 20 percent against the US dollar since Kuroda took the post in 2013, helping Japanese exporters and lifting stock prices.
The yen gained for a second day yesterday, climbing 0.4 percent.
Nonetheless, recent weakness in exports, household spending and production have prompted concern that a global economic slowdown is starting to weigh on Japan’s economy.
Economists, including David Carbon of DBS Bank Ltd in Singapore, have said the government needs to follow through on Japanese Prime Minister Shinzo Abe’s promised economic reforms to pull the nation out of stagnation, rather than leave the burden entirely to the central bank.
The negative interest-rate policy will not affect individual depositors if banks react by investing actively, Seko said at the prime minister’s residence in Tokyo.
“This doesn’t mean that financial institutions will be offering negative interest rates,” he said. “If the banks act appropriately, this is not something that will affect ordinary depositors.”
The appropriate response on the part of the banks would be to “actively lend money and make investments,” he said.
Seko said that the Bank of Japan has been communicating with financial institutions to make sure the effect of the new policies on their profits is not too harsh, adding that he wanted to monitor the situation.
The negative-interest rate plan, which was approved by the bank’s board in a 5-4 vote, is to take effect on Feb. 16.
On Friday last week, the bank announced it was delaying for the third time in a year the timing of reaching its 2 percent inflation target.
It is now aiming to reach that level by about the six months starting in April next year.
“It can’t be helped, because it was not foreseeable that oil prices would fall to this extent,” Seko said. “The target is being maintained and policies are being introduced to achieve it, so I’m not concerned.”
Debate is deepening over whether Japan’s economy can withstand the effects of a planned sales-tax increase in April next year, after rises in 2014 and 1997 both sparked economic contractions.
“The global economy may affect the Japanese economy somewhat, or it may be actually affecting it now,” Seko said.
Whether that leads to a delay in the introduction of the sales tax rise depends on economic conditions at that point, he said.
He declined to comment on when the final decision will be made.
Seko said Abe has committed to raising the tax as planned unless there is an event on the scale of the 2008 financial crisis, referred to in Japan as the “Lehman shock.”
“We will have to decide at that point whether it is on the scale of the Lehman shock,” he said. “It would be an unhappy situation for the Japanese economy if there were another event like the Lehman shock, so Japan will take necessary economic measures to stop that from happening.”
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