BoJ’s Himino highlights benefits of ending negative rates

Bank of Japan (BoJ) deputy governor Ryozo Himino has said exiting from a negative interest rate policy could benefit households and firms, adding to signs that an end to the central bank’s ultra-loose policy may be on the horizon.

At its last policy meeting on October 30 and 31, the BoJ kept its short-term policy rate unchanged at -0.1%, where it has remained since 2016. But it further loosened its control on long-term government bond yields, reinforcing analysts’ expectations that it is phasing out its massive stimulus programme. 

Japan’s inflation has stayed above the BoJ’s 2% target since April last year. But policymakers have repeatedly stressed the need for wages and prices to form a virtuous rising cycle to stop the country slipping back into deflation.

Sticking to the official stance, Himino told a group of business leaders today (December 6) that the BoJ would “patiently continue” with monetary easing until the prospect of Japan achieving sustainable 2% inflation, accompanied by wage increases, has come in sight.

But he also explained in rare detail what ending negative interest rates in Japan could mean for Japan’s households, firms and banks.

“If positive interest rates were to return, it may be expected that the household sector, which holds more financial assets than liabilities, will see improvement in net interest income on the whole,” he said. 

For businesses as a whole, the impact of rising interest rates on their overall net interest income may be limited, the official said. This is because firms have reduced debt and accumulated funds over the past years. 

For banks, Himino said that as interest rates rise, banks could face higher unrealised losses on the long-term bonds they hold, as well as higher default risks from their borrowers.

But he added that the period of rising interest rates would prompt banks to replace the bonds they hold with new ones to increase their investment yields. Firms may also become more willing to invest with the economy improving, leading to a higher demand for loans. This in turn would make it easier for banks to secure their profit margins, Himino said.

“In other words, while there may be a certain degree of stress in the shorter term, it would be much easier for banks to find ways to be profitable compared to when they were in an environment of continued low interest rates,” Himino said.

He said banks would need to adopt appropriate risk management to weather the stress in the transition phase. But the central bank believes the financial system is resilient enough to withstand such stress, he added.

The BoJ should carefully monitor the evolution of wages and prices, judge the timing of an exit from the negative interest rate policy and design its process, he said.

“If this is done properly, there would be a sufficient possibility of achieving a positive outcome from the exit, since a wide range of households and firms would benefit from the virtuous cycle between wages and prices,” Himino said.

The official also said the BoJ has observed “solid progress” in firms’ price- and wage-setting behaviour. The BoJ’s recent analysis showed that higher prices are contributing towards wages more significantly than in the 2010s, he said.

Statistically it is less clear that higher wages are already pushing firms to raise the prices of their goods and services, Himino said, but the central bank expects such effects to increase.

“I think that these results are signs in the right direction, if not definitive,” Himino said.