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Why Negative Interest Rate Is Not an Option in Japan?

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Deutsche Bank

Research

Japan

Economics

Date

3 December 2015

Mikihiro Matsuoka

Chief Economist

(+81) 3 5156-6768

mikihiro.matsuoka@db.com

Japan Monetary Policy Watch

Why negative interest rate is not an

option in Japan?

Some financial market  participants expect a  cut in the  interest rate on  excess

reserves,  possibly into  negative  territory, as  one  of the  options  for the  next

round of monetary easing  in Japan. We believe this is  very unlikely to happen.

This  report examines:  1)  the introduction  of  ‘credit  easing’ measures  in  the

Euro area, 2) the effect of the interest rate  cut on the net interest margin of the

commercial  banks,   and  3)  the   negative  externality   arising  from  negative

interest rates on the banking system.

Various asset  purchase programs  (APPs) and the  cut in  interest rate  on bank

reserves  were introduced  as  ‘credit  easing’ measures  in  the  Euro area.  We

believe  APPs,  not  negative  rates,  have  largely  contributed   to  the  ongoing

economic improvement. Cuts in policy rates  improve the net interest margin of

the commercial banks in  the short run, which  borrow short and lend long,  but

squeeze the  margin  in the  long run.  The net  interest  margin in  Japan is  the

smallest among those  who introduced negative rates.  The percentage of bank

reserves  in commercial  banks’  total  assets is,  by  far,  the highest  in  Japan.

Negative rates  most  likely will  squeeze the  profitability of  commercial banks

and impede the soundness of the banking system in Japan.

Negative rates on  deposits form a  new taxation of  government on the private

nonfinancial sector  (households and companies),  which begins  to prefer cash

to  bank  deposits  (a  silent  bank  run).  This impedes  two  most  fundamental

comparative  advantages of  the  banking sector  (credit  creation  and maturity

transformation)  and  damages  the  stability  of  the  banking  system.  We  are

concerned  about  the acceleration  in  the  growth of  bank  notes  in  countries

which introduced  negative  rates, and  Japan  along with  the flattening  of  the

yield curve. Strong preference of households  and companies in Japan for fixed

interest financial assets could also deter the introduction of a negative rate.

We surmise that the  Bank of Japan might possibly have  learned a lesson from

Global   Financial   Crisis    that   macroeconomic   monetary    policy   and

the

microeconomic  financial  supervision   cannot  be  separated.   After  the  GFC,

developed countries have  been facing confrontation  between the two.  Tighter

financial  supervision  comes   at  a  cost   of  slowing  economic  activity.   This

conflict between  monetary policy  and financial  supervision does not  seem to

have surfaced in Japan, a rare commending observation for Japan.

Percentage of bank reserves in total assets of commercial banks

(%)

25

EA19

Denmark

Sweden

20

Switzerland

Japan

15

10

5

0

2005

2007

2009

2011

2013

2015

Sources: Haver Analytics, DB Global Markets Research

________________________________________________________________________________________________________________

Deutsche Securities Inc.

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.


 

3 December 2015

Japan Monetary Policy Watch: Why negative interest rate is not an option in Japan?

Why negative interest rate is not an option in Japan?

The  Bank  of Japan  has  continued  its  quantitative  and qualitative  monetary

easing (QQE)  for more  than two  years and  a half  in expanding the  monetary

base  at an  annualized  JPY70-80trn since  April  2013.  Some financial  market

participants  expect  a  cut  in  the interest  rate  on  excess  reserves  (currently

0.1%), possibly into  negative territory as one  of the options for the  next round

of monetary  easing. This  report  examines: 1)  the ‘credit  easing’ measures  in

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