Bank of Japan mulls over negative rate on some loans

This may positively impact economy but would also raise questions about subsidies to lenders, say officials

TOKYO • Having adopted a negative interest rate on some excess reserves to penalise financial institutions for leaving money idle, the Bank of Japan (BOJ) may consider helping them lend by offering a negative rate on some loans, according to people familiar with talks.

Such a discussion could happen in conjunction with any decision to make a deeper cut to the current negative rate on reserves, said the sources, who asked not to be named.

The BOJ's Stimulating Bank Lending Facility, which now offers loans at zero per cent interest, would be the most likely vehicle for this option, they said yesterday. The officials said adding this to the central bank's arsenal could have a positive impact on the economy, but would also raise questions about giving subsidies to commercial lenders.

Financial institutions, which already feel penalised by the existing negative rate, could face demands from borrowers to cut their lending margins further, said the sources.

Bank shares rallied on optimism the measure could be adopted, and the yen dropped.

The BOJ had extended 24.4 trillion yen (S$29.8 billion) of credit under the Stimulating Bank Lending Facility as of April 10. This initiative is separate to the core of the BOJ's monetary easing initiative, which targets an expansion in the monetary base, mainly through purchases of government bonds.

The BOJ board next meets to set policy on April 27 and 28, and analysts have increasingly seen a likelihood of some sort of action to counter an appreciation in the yen and damage to expectations for inflation. Against the US dollar, the yen slid 1 per cent to 110.58 as of 4.59pm in Tokyo (3.59pm in Singapore) yesterday, helping pare some of the currency's appreciation since BOJ policymakers last gathered.

BOJ governor Haruhiko Kuroda flagged his concerns about a strengthening in the yen in an interview with The Wall Street Journal last week. That sentiment is shared by senior officials at the central bank, people familiar with the discussions said earlier this week. European policymakers also have taken a step towards providing subsidised funds for banks to lend to their customers in a programme set to start in June.

In Japan, where the sub-zero rate became effective in February, a survey of senior loan officers showed this week that banks' profit margins from lending to highly rated companies dropped to the lowest level in almost a decade.

The BOJ's quarterly survey also showed that demand for credit from large, medium-sized and small firms all dropped.

"This wouldn't address the underlying structural problem for the banks, which is not a loan supply issue but a demand issue," Jefferies Group analysts said in a report.

The BOJ said in its semi-annual financial system report on Friday that its monetary easing with a negative interest rate "will exert further downward pressure on financial institutions' profits for the time being".

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A version of this article appeared in the print edition of The Straits Times on April 23, 2016, with the headline 'Bank of Japan mulls over negative rate on some loans'. Print Edition | Subscribe