Why Negative Interest Rate Is Not an Option in Japan?
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