The Bank of Japan (BOJ) took a wrong turn by adopting negative interest rates this year, says Takeshi Fujimaki, the Japanese banker turned opposition lawmaker who first called for sub-zero yields two decades ago.
Bank Governor Haruhiko Kuroda’s decision to charge for some deposits parked at the central bank is punishing those who hold the cash he just spent two-and-a-half years pumping into the economy. The BOJ is also boxing itself into a corner because it will not be able to stop its asset purchases once inflation takes hold, raising the specter of fiscal collapse as yields soar, the 65-year-old lawmaker said.
“The BOJ is trapped,” Fujimaki, who has been predicting an eventual default in Japan over the past 20 years, said in an interview at his office in Tokyo on Tuesday last week. “Minus rates weaken the yen and push up inflation, but the BOJ doesn’t have the courage to expand negative rates because that will expedite a fiscal collapse.”
The decision to set negative rates, which scraped through on a 5-4 vote at the Jan. 28 to Jan. 29 BOJ meeting, has driven bond volatility to the highest since 2013 as 10-year yields plunged below zero for the first time.
While the European Central Bank (ECB) has the same policies, Japan’s problem is that it adopted them in the reverse order, flooding the system with cash under qualitative and quantitative easing and then penalizing holders of cash with negative rates, Fujimaki said.
That includes the central bank, which now owns more than one-third of the country’s government bonds.
Negative rates are a conventional central bank tool and will have an effect, but then things get tricky, Fujimaki said.
“The BOJ needs to raise rates when the economy improves and inflation rises: Can they raise rates when the economy is flooded with abundant cash?” he said. “It can’t absorb the money it provided through QQE [quantitative and qualitative easing]. The BOJ needs to exit QQE and absorb the money. To do that, it needs to sell JGBs [Japanese Government Bonds], but who in the private sector would buy when they know prices will fall?”
In contrast to previous surprises from Kuroda when he started massive asset purchases and then expanded easing, negative rates have not helped the stock market. Japan’s TOPIX tumbled as much as 17 percent this month and is heading for its first three-month slide since early 2014. Shares in the banking sector have plunged 23 percent since the day before Kuroda’s announcement. Negative rates are likely to shrink net interest margins that are already among the lowest in the world.
Japan’s uncollateralized overnight call market, the core funding markets because it is where banks lend to each other, has been slow to adapt to the BOJ’s latest policy. Domestic banks did not borrow or lend at negative rates until three days after they came into effect on Tuesday last week as financial institutions were caught unprepared to set up systems to deal with them.
“As a result of QQE, the yield curve has flattened and because bank deposits aren’t negative, banks are suffering from reserve curve that’s hurting their profitability,” said Fujimaki, who was briefly at Soros Fund Management in 2000, joined the Tokyo office of Morgan Guarantee Trust Co in 1985 and won his upper house seat in July 2013. “If the curve is steep, banks can make profits even at negative rates. It was a mistake to adopt negative rates after QQE.”
The BOJ announced its negative rate policy amid concern that the unprecedented bond-buying to expand the monetary base by ￥80 trillion (US$708 billion) annually is reaching its limit, while the goal of stable 2 percent inflation remains a distant prospect.
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