ANALYSIS-With new bank assistance, the BOJ stealthily withdraws from negative rates
* The BOJ is navigating uncharted territory by subsidizing regional banks
* Some BOJ members say the program dangerously reduces political powers
* Movement shows Kuroda’s defense against stimulus policy is crumbling
* Aid program highlights concerns about the fate of regional banks
* Concerns over the cost of stimulus measures could hamper negative rates from worsening
TOKYO, Nov.26 (Reuters) – The Bank of Japan is quietly reversing its unpopular negative interest rate policy with a controversial program designed to foster mergers between weaker and smaller lenders, a move some insiders see as a risky deviation from industrial reform.
As COVID-19 adds pain to regional banks suffering from years of ultra-low interest rates, the BOJ this month unveiled a plan to pay 0.1% interest on deposits held by lenders who cut costs, increase profits, or consolidate.
The program means that the BOJ will for the first time offer payments to a specific industry with the aim of driving reform in that sector. Critics warn that such a policy should be led by elected officials, not central bankers.
“The BOJ is pushing the non-viable banks to merge before they end up going bankrupt,” said Tomoyuki Shimoda, a former BOJ official who is now a professor at Hitotsubashi University. “It’s a pretty bold move. There is no going back. “
Some BOJ leaders were against the project, which challenged the central bank’s tradition of being “a lender, not a spendthrift,” according to three sources with direct knowledge of the matter.
But after more than a year of preparatory work by BOJ bureaucrats and banking regulators, the plan came to fruition, the sources said, a sign that regional banks were in worse shape than BOJ Governor Haruhiko Kuroda was ready to. admit it.
“It’s a message to regional banks that time is running out,” said one of the sources. “Without the gravity of the problem, the BOJ would not have gone this far,” said another source, a view echoed by a third source.
The BOJ declined to comment on the story.
The ruling underscores how Kuroda’s defense of his stimulus policies – and his take on the cost of extended easing is manageable – is crumbling, forcing him to pay the price for his sweeping measures with one more program. more controversial.
It also marked a further pullback from negative rates, a policy long criticized by banks as crushing yields across the curve and shrinking already thin margins, two other sources said.
The policy was unpopular from the start. Just eight months after its launch in 2016, the BOJ was forced to set a 10-year bond yield target to avoid an excessive drop in long-term rates.
It also reduced the pool of funds at which negative rates were applied to around 5,000 billion yen ($ 48 billion) – or 1% of the total reserves of financial institutions with the BOJ.
“The aid package is part of the BOJ’s attempt to phase out the impact of negative rates, which has been going on for a few years,” said former BOJ executive Hideo Hayakawa, who remains in contact. close with the political decision-makers in place.
“The BOJ cannot openly admit that the policy has been a failure or abandon it altogether, so it is quietly calling it back,” he said.
Of the nearly 70 trillion yen in reserves, about 50 trillion yen could be targeted for 0.1% stake for up to three years, according to the Dai-ichi Life Research Institute.
Short-term rates can rise if banks solicit the markets for funds which they then transfer to BOJ deposits to earn 0.1% interest. This would complicate the BOJ’s efforts to meet its short-term rate target of -0.1% and cast doubt on Kuroda’s argument that the program will not affect monetary policy, some analysts say.
The fact that the BOJ has crossed the line to prevent a banking crisis highlights growing concern among policymakers about the growing cost of prolonged easing.
The combined net profits of Japan’s 102 regional banks have fallen 40% over the past four years as credit lines have fallen to 0.2%.
A recent BOJ stress test showed that in the most severe economic downturn scenario, their average capital-to-asset ratio would drop to 7% in FY2022 from the current 10% and a few points above. above the 4% required.
Several board members of the BOJ have publicly warned that an increase in bankruptcies caused by a pandemic could overwhelm banks with bad debts and threaten Japan’s financial system.
“It has become extremely important to pay more attention to the side effects of a prolonged easing,” Board member Takako Masai said, noting that the BOJ should focus on the sustainability of its policy framework rather than to deploy new stimulus measures.
Growing concern among the board about the drawbacks of his stimulus package could make it harder for Kuroda to ease further, especially by worsening negative rates.
“If the banking sector’s problems are as severe as the BOJ suggests, worsening negative rates would make matters worse,” said a fourth source close to the BOJ’s thought. “It’s pretty clear that the BOJ wants to avoid escalating negative rates.”
$ 1 = 104.3300 yen Reporting by Leika Kihara; Additional reporting by Takahiko Wada and Kentaro Sugiyama; Editing by Sam Holmes