World Economy

Negative Rates Slowly Lifting Japan’s Economy

Negative Rates Slowly Lifting Japan’s EconomyNegative Rates Slowly Lifting Japan’s Economy

The Bank of Japan’s negative interest rate policy is gradually boosting the real economy, Gov. Haruhiko Kuroda told reporters Thursday after a policy meeting in which the central bank decided against further monetary easing.

Thursday marked four months to the day since the BOJ implemented the controversial policy. Kuroda stressed its initial impact: bringing down rates across the yield curve, Nikkei reported.

The yield on 10-year Japanese government bonds, the benchmark for long-term rates, has touched a record low of minus 0.21%, while yields on ultra long-term debt, such as 20-year notes, have also fallen. The policy has proven more powerful in lowering various types of interest rates than the central bank expected, the governor noted.

He went on to discuss the effects of negative rates on the real economy, including residential investment and capital spending. Housing starts rose 9% year on year to more than 80,000 in April. “Housing investment has definitely recovered, and rental homes have increased sharply,” Kuroda said, adding that he expects clearer benefits in the future.

With low real interest rates allowing businesses to borrow funds cheaply, planned capital spending is very solid, Kuroda said. Capital expenditures are expected to grow 3.8% this fiscal year, according to a finance ministry survey.

But negative rates have yet to make a positive impact on households. Kuroda noted “steady improvement in the employment and income situation” but conceded that consumption has not picked up as much as had been hoped.

The view that the BOJ’s 2% inflation target is still a long way off remains widespread in financial markets. The bank “will implement further easing without hesitation if necessary,” Kuroda said.

Chiming in on the debate over so-called helicopter money, the governor ruled out directly funding fiscal spending, noting that this avenue is impossible under Japan’s current laws.

 Three-Pronged Approach

Even as the BoJ stood pat, there were expectations that the central bank will ease further at its next meeting in July, when it issues fresh quarterly growth and inflation forecasts, Reuters reported.

Some economists predict the central bank could take a three-pronged approach in July: increasing its already massive government bond purchases, buying more riskier assets and cutting rates further into negative territory.

Economists also worry that a firming yen, which makes imports cheaper, will further dampen inflation.

The yen spiked to a 22-month high of 103.61 yen to the dollar following the BoJ’s decision, fueled by yen bulls who were already selling the dollar after the US Federal Reserve held off on raising interest rates on Wednesday and slightly cut its outlook.