Bank of Japan Governor Haruhiko Kuroda said on Monday it is “still fully possible” to cut interest rates deeper into negative territory and to quantitatively expand monetary policy further.
The BoJ “should not hesitate” to decide on additional easing, he said during a speech in Tokyo, Asia.Nikkei reported.
But the governor also said it is important to take into account the impact that the negative interest rate policy might have on the financial system.
Kuroda said the “comprehensive assessment” of the BoJ’s monetary policy at its next policy meeting on Sept. 20-21 “will not be a discussion on winding down the easing measures,” hinting at the possibility of further loosening.
The BoJ embarked on a quantitative and qualitative monetary easing policy in April 2013. It promised to boost inflation to 2% in two years but has yet to make good on that commitment.
In the speech, Kuroda underscored that corporate earnings, the labor market and incomes have improved in the three or so years since the introduction of the easing policy. Prices are clearly on a recovery path, he said.
The upcoming policy meeting will discuss “what is preventing [the bank] from achieving the 2% goal” and the “effects and impacts” of the BoJ’s monetary policy, he said.
Kuroda said it is still fully possible “to further expand easing measures in terms of quantity, quality or interest rate.”
Strong Banks
Other options should not be taken off the discussion table, either,” he added. Kuroda said Japan’s banks were strong and it was “entirely inconceivable” that this policy would get in the way of “financial intermediation”.
In June he said “there is no evidence, whatsoever” that negative rates have had “any major adverse effects on the profitability of financial institutions or undermined their financial intermediation functions.”
The European Central Bank is surely watching closely for lessons learned, but Kuroda figures the effects may be somewhat unique to Japan. Japanese banks’ larger stock of deposits relative to loans, combined with a shrinking spread between deposit and lending rates, make more vulnerable to negative-rate profit damage than banks in other parts of the world.
The International Monetary Fund estimated last month that to offset the negative-rate policy’s impact on their net interest income, Japanese banks’ domestic loans need to grow 4% a year—twice the 2% pace of domestic bank lending as of June.
Acknowledging the downsides of negative rates doesn’t mean the policy is going away. Kuroda said there is “ample space” to go deeper into negative-rate territory. He could be laying the groundwork for more substantial goodies in the form of expanded lending facilities for banks in case the rates do go more negative.
