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Moody's says BOJ negative rates unlikely to boost lending

Wednesday, February 24, 2016 - 17:05

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Europe's experience with negative interest rates suggests the Bank of Japan's adoption of the same policy is unlikely to spur lending to businesses and households, Moody's Investors Service said on Wednesday.

[TOKYO] Europe's experience with negative interest rates suggests the Bank of Japan's adoption of the same policy is unlikely to spur lending to businesses and households, Moody's Investors Service said on Wednesday.

The BOJ's negative interest rate is unlikely to make it cheaper for the government to borrow because funding costs are already very low and only a fraction of outstanding debt will be refinanced at lower rates, Moody's said in a report.

The policy could lessen domestic investors' appetite for government debt that underpins Japan's A1 rating with a stable outlook, Moody's said. "As far as negative interest rates are concerned, the evidence from Europe points to a limited pass-through to Japanese households and corporates," said Michael Taylor, managing director and chief credit officer for Asia at Moody's.

The BOJ stunned investors last month by adopting a negative 0.1 per cent interests rate, which means it charges commercial banks that amount on a small portion of reserves they keep at the central bank.

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The BOJ took its cues from the European Central Bank as well as central banks in Switzerland, Sweden and Denmark, which have all previously introduced negative interest rates.

The yen's gains versus the dollar since the BOJ decided the policy shows investors do not expect negative rates to improve inflation, and it is unclear whether this policy will cause the yen to weaken in the future, Moody's said.

BOJ Governor Haruhiko Kuroda has repeatedly indicated he is prepared to cut rates again to meet its 2 per cent inflation target around the first half of fiscal 2017.

The central bank is also buying government debt at an annual pace of 80 trillion yen (US$713.90 billion) as part of quantitative easing, but the central bank has delayed the timing of its price target four times since it began these debt purchases in 2013.

Economists and some BOJ board members say 2 per cent inflation is unlikely due to downward pressure from oil prices and weak domestic demand.

REUTERS

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