KUMAMOTO, Japan – A Bank of Japan board member warned of potential dangers if the central bank’s already massive stimulus is ramped up, a view suggesting there is no consensus on how quickly it should ease policy again to head off the risk of recession.
Hitoshi Suzuki, a former commercial banker turned BOJ policymaker, said on Thursday borrowing costs have yet to reach levels considered as the “reversal rate” – or the level at which the demerits of low interest rates exceed the benefits.
But Suzuki said rates may already be approaching such a level, as years of ultra-low rates strain financial institutions.
His comments signal that he would cast a dissenting vote if Governor Haruhiko Kuroda were to propose deepening negative rates.
“I don’t see the need to ease monetary policy further now,” Suzuki told reporters after meeting business leaders in Kumamoto, southern Japan.
“It’s hard to predict when Japan will see borrowing costs reach a reversal rate. But it might not be too distant in the future,” he added.
Suzuki’s remarks underscore a rift within the nine-member board that could make it hard for Kuroda to meet his pledge to ease “without hesitation” to underpin the economy’s recovery.
In a speech, Suzuki said further declines in rates could do more harm than good to the economy as it would prompt financial institutions to charge a fee on deposits.
“If bank deposit rates effectively turn negative, it could hurt the economy by cooling consumer sentiment,” Suzuki said.
“Once the financial system destabilizes, it will become very difficult to achieve price stability,” he said, stressing that the BOJ needed to pay more attention to the health of Japan’s banking system in guiding monetary policy.
ROOM FOR PRE-EMPTIVE STEPS?
Markets expect the US Federal Reserve and European Central Bank to loosen policy next month to counter headwinds from a bitter US-China trade war.
That is piling pressure on the BOJ to follow in their footsteps to prevent the yen from spiking against other currencies and hurting Japan’s export-reliant economy.
While some like Suzuki fret about the rising cost of prolonged easing, other board members see room to act pre-emptively to prevent the economy from losing momentum to achieve the BOJ’s elusive 2% target.
Suzuki said he had doubts over the feasibility of deepening negative rates, which is seen by markets as among options if the BOJ were to ease as early as next month.
The BOJ is in a bind. Years of aggressive money printing have crushed long-term interest rates and hurt profits of financial institutions by narrowing the margin they earn from borrowing cheap funds and lending at a higher rate.
It has also left the BOJ with little ammunition to fight another recession.
Under a policy dubbed yield curve control (YCC), the BOJ guides short-term rates at -0.1% and the 10-year government bond yield around 0% via heavy asset buying.
Cutting rates would undermine the purpose of YCC, which was intended not just to cap bond yields but to prevent them from falling too much and hurting commercial banks.
Add to headaches for BOJ policymakers, global bond yield declines briefly pushed Japan’s 10-year yield JP10YTN=JBTC to -0.285% on Thursday. That is the lowest since July 2016 and well below the -0.2% level that market players perceive as the BOJ’s effective line in the sand.
Suzuki said recent falls in Japanese bond yields are driven mostly by market expectations yields will decline further, which is steering investors to seek short-term gains by buying bonds now in hope of selling them at a higher price later.
Once such expectations shift, yields will normalize, Suzuki said, adding “We don’t need to be too rigid about the range. At times, yield moves might be somewhat extreme.”