Two Years of Negative Interest Rate Policy

Two years have passed, since Bank of Japan introduced negative interest rate policy in February 2016. Although the bank hoped active investment with borrowing money from commercial banks, the policy has not produced such an effect. Rather, negative interest rate caused deterioration of the balance of commercial banks or operation of pension system. While the policy is going to be kept under the leadership of BoJ Governor Haruhiko Kuroda, the side effect is kept on accumulated.

 

BoJ introduced two years ago the policy of declining the interest rate of checking account for commercial banks as low as -0.1%. When a commercial bank deposits money in its checking account of BoJ, it has to pay 0.1% of commission. It sounds like penalty of keeping money, not flowing into the market.

 

When BoJ introduced monetary easing policy in different dimension in 2013, BoJ purchased governmental bonds from the commercial banks, expecting them to lend money to various businesses. Contradictory enough, the commercial banks did not deliver their money received from BoJ, but deposit it in BoJ checking account instead. BoJ urged them shifting money from BoJ checking account to lending with introduction of negative interest rate policy.

 

Long-term interest rate declined immediately. The rate of 10-year governmental bond declined as low as -0.3% in July 2016. House owners rushed to the commercial bank requiring change of plan of housing loan in lower rate. There appeared a number of new owners of renting house, who could achieve necessary resource with low interest rate policy.

 

Pension system, which stands on moderate interest rate, severely suffered from BoJ policy. Insurance companies could not manage their business along with decline of interest rate of governmental bond. They raised the price of saving-type insurance or even stopped sales of it. Insurance companies expect BoJ a change of inflation target policy, if the side effects get serious.

 

Commercial banks are frustrated with decline of their income through lending. Major commercial banks are worried about damage of financing system in Japan, if low interest policy would be maintained too long. But Prime Minister Shinzo Abe supports Kuroda’s monetary easing policy, because Abe believes in a notion that good condition in economy will support his political agenda including constitutional amendment. He looks like having no exit policy.