BoJ Keeping Close Eye on Bank Profits

Under the Bank of Japan’s latest monetary policy framework, set at its September policy board meeting, “due attention should be paid to the impact of the negative interest rate policy on financial institutions’ profits,” the minutes of that meeting show.

At the Sept. 20-21 meeting—in which the BoJ switched its policy to interest rate targeting from quantitative easing—several of the board members shared the view that the launch of negative interest rates in February had “substantial effects in lowering interest rates” as well as “a large impact on financial institutions’ profits,” the minutes show, Nikkei reported.

They concluded that the switch in focus to short- and long-term interest rate targets would allow “flexible adjustments according to developments in economic activity and prices and in financial conditions.”

Regarding controlling long-term interest rates, one member pointed out that “since the global financial crisis, central banks in Europe and the US had added to their monetary policy tools large-scale purchases of government bonds, through which they had placed downward pressure across the entire yield curve.”

Another member, however, noted that when the US Federal Reserve capped long-term interest rates in the 1940s and 1950s, “the amount outstanding of its government bond holdings grew substantially over a short period of time, during a phase of heightened inflation risk.”

 Maintaining Momentum

Regarding possible options for additional monetary easing, the board members agreed that the bank would make policy adjustments as appropriate if judged necessary for maintaining the momentum toward achieving the 2% price target.

The bank noted that it could cut short-term policy interest rates and the target level for long-term interest rates, as well as expand asset purchases. The minutes also show that the BoJ is willing to accelerate the expansion of the monetary base if the situation warranted such action.

But one member said achieving both the interest rate targets and maintaining a loose goal on the pace of bond buying at the same time was “difficult,” the minutes said.

Japan’s core consumer prices fell for a seventh straight month and household spending slumped in September, underscoring the challenges of hitting the BoJ’s 2% inflation target.

In a glimmer of hope, however, data on Monday showed real wages rose for the eighth consecutive month in September, which could support consumption in coming months.