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Japan Central Bankers Argue About Negative Rates

Bank of Japan Gov. Haruhiko Kuroda Press ConferenceBank of Japan Gov. Haruhiko Kuroda Press Conference
The Japanese national flag flies atop the Bank of Japan (BOJ) headquarters in Tokyo, Japan, on Tuesday, March 15, 2016. Bloomberg Bloomberg via Getty Images

Bank of Japan policymakers engaged in heated debate on the pros and cons of their decision in January to adopt negative interest rates, with one even saying it was preferable to roll it back, a summary of their opinions at the March 14-15 rate review showed on Thursday.

“It’s preferable to roll back the negative rate policy. But abandoning it immediately after introducing it would cause market confusion and risk eroding trust in the BOJ. With the effects (of the policy) still not clear, we should maintain the policy,” one of the nine board members was quoted as saying.

Another board member said rolling back the policy was “out of the question” as markets were already moving on the assumption that negative rates would remain in place, the summary showed.

The BOJ unexpectedly cut a benchmark interest rate to minus 0.1% in January as it stepped up its faltering efforts to revive growth and pull Japan out of years of deflation.

But the historic shift to such a radical policy prescription – adopted by some major central banks in Europe – has failed to boost stock prices or arrest an unwelcome rise in the yen, drawing criticism from lawmakers for confusing, rather than calming, markets.

The decision was made by a 5-4 vote with dissenters arguing that pushing down already low borrowing costs won’t help the economy much and could backfire by hurting banks’ profits.

The vote is evidence of how closely divided opinion is within the central bank. But the aggressive stimulus side responsible for negative rates is expected to get a boost from a new member soon replacing one board governor who voted against the negative rates.

At the March meeting, advocates of negative rates said the policy was exerting its intended effects with mortgage loan rates and corporate borrowing costs already on the decline, the summary said.

Dissenters, however, argued the policy may have aggravated the public’s deflationary mindset by causing anxiety over the outlook for Japan’s economy.

Others said the policy gave markets the impression the BOJ had no other choice but to revert to a negative rate policy because its asset-buying program was reaching the limits.

“All the demerits of the policy I raised as risks … are materializing,” one board member said.

Concerns were expressed over the gloomy outlook, with one member warning that risks to the economy remained tilted to the downside, the summary noted.

At the March meeting, the BOJ kept monetary settings unchanged but downgraded its economic assessment, signaling its readiness to implement additional stimulus if risks threaten to derail a fragile economic recovery.