[TOKYO] The Bank of Japan implements negative interest rates on Tuesday in a radical plan already deemed a failure by financial markets, highlighting Tokyo's lack of options to spur growth as global markets sputter.
The central bank, putting into effect a Jan 29 decision that stunned investors, will charge banks 0.1 per cent for parking additional reserves with the BOJ - in a bid to push down interest rates and encourage banks, businesses and savers to spend and invest.
While the negative-rate announcement briefly drove down the yen and buoyed Japanese share prices, markets quickly reversed as the policy backfired with investors.
"It's getting clearer that Abenomics is a paper tiger," said Seiya Nakajima, chief economist at Office Niwa, a consultancy, referring to Prime Minister Shinzo Abe's policy mix of monetary easing, spending and reform. "The impact of monetary easing is similar to currency intervention. The first time they do it, there's a huge impact. But as they repeat it, the impact will wane," said Mr Nakajima.
Though senior BOJ officials were at pains to say they had calibrated only a minor impact on Japanese banks, their stock prices plunged, contributing to a global meltdown in financial shares that drove the latest leg down in the global market rout.
To some extent, the BOJ was beset by bad timing, as global markets were already in a tailspin over concerns about China's slowdown, US rate hikes and cratering oil prices.
Still, the reaction appeared to fly in the face of BOJ Governor Haruhiko Kuroda's assertion that his policy was having its intended effects.
"It seems as though the BOJ's action triggered the market moves," said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management. "But a better explanation would be that concerns elsewhere overwhelmed the BOJ action."
In the 11 days since the BOJ board's announcement, the benchmark Nikkei index has fallen 8.5 per cent, despite a sharp rebound on Monday, while the yen has climbed 6.5 per cent against the dollar.
Japanese bank shares have slumped by as much as 30 per cent as it is considered unpalatable for them to pass on negative rates as a surcharge on depositors, who already barely get any interest on their savings. Negative rates could push down bank operating profits by 8-15 per cent, Standard and Poor's said.
The 10-year Japanese government bond yield initially fell below zero on the easing - a first among Group of Seven economies. But it has recovered from minus 0.035 per cent last week to 0.090 per cent above zero, with Japanese markets becoming more unstable as investors are at a loss on how to reckon fair value.
Prices on 10-year JGB futures imply volatility above 5 percent, a 2.5-year high and more than triple the level at the start of the year. This high volatility could persist, and the BOJ has only itself to blame, some market players say.
Mr Kuroda told parliament it wasn't the BOJ's policy but"excessive risk aversion" that was behind the global market turbulence.
And BOJ Deputy Governor Hiroshi Nakaso told a New York audience on Friday that the new, three-tiered rate scheme "is carefully designed to mitigate aggressive impact on banks'profitability while ensuring the effect of negative rates on prices in financial markets."
But a former BOJ official who retains close contact with central bankers said this "is essentially saying that the effect of its policy itself is limited," adding: "If the move was aimed at weakening the yen, it failed completely."
Some BOJ officials privately worry whether the central bank can keep gobbling up JGBs at the current pace of US$700 billion a year, as negative rates would discourage financial institutions from piling up the cash they would earn by selling JGBs to the BOJ.
Japan's three 'megabanks' have scrambled to buy JGBs and corporate bonds, seeking whatever meagre interest they can earn without taking on much risk.
While Mr Kuroda notes the BOJ can cut rates deeper below zero, market participants say there's little hope that more of the same would have a beneficial effect.