Monetary Easing into Different Dimension

Governor of Bank of Japan, Haruhiko Kuroda, announced on Friday that the bank would start charging commission on the deposit of commercial banks, which meant introducing negative rate policy for the first time. The purpose was to reinforce current monetary policy, called quantitative and qualitative easing, by adding effect of interest. Considering negative impact of the new policy on the banks, however, Kuroda insisted on implementing his words for 2% inflation.

The abrupt announcement was nothing but shock and awe strategy. “We are going to apply negative rate to checking accounts, or take further measures, if necessary. With continuous and massive purchase of long-term national bond, we are putting downward pressure on monetary interest,” told Kuroda in his press conference. He promised that he would continue the new policy until Japanese economy would reach a point enough to stably maintain the target of 2% commodity price hike. He also explained that his policy would be avoiding weaker functioning of monetary mediation, brought by fiscal unbalance of commercial banks, through applying different interests by dividing checking accounts into three parts.

Having said that, media organizations were not sure whether the new policy would work well. Nikkei Shimbun called the policy “powerful drug.” Bloomberg reported that Kuroda stock rally had gone in 28 minutes in Tokyo market on Friday. Asahi Shimbun interpreted the announcement as postponing 2% target of inflation.

Bank of Japan introduced zero-interest policy in 1999 and quantitative easing in 2001, which was insufficient to get rid of deflation. As Kuroda easing, starting 2013, proved to be not enough to tackle consistent deflation, the market was talking about the limit of monetary easing policy. Kuroda tried to wipe off those skepticisms with new surprise. There was no time limit for new negative rate policy.

There is a negative aspect of the new policy. There is an aspect that negative rate is a kind of taxation on commercial banks. It may weaken profit of commercial banks, leading to negative attitude in rending money especially to small or midsize businesses. Although Kuroda stressed that negative rate policy had already been introduced in Europe, that policy was recognized as not producing new money rending so much. Bank of Japan looks like compensating slow progress of wage and asset investment based on negative trend of international economy with forcible policies in a top-down manner. Uneasiness of market may be stemming from that power economics.