BOJ Kiuchi warns negative rates could destabilise banking system

[KAGOSHIMA] Bank of Japan board member Takahide Kiuchi said negative interest rates could destabilise Japan's financial system by squeezing banks'margins, underscoring worries among some policy makers of the risks of last month's radical decision.

Mr Kiuchi, among four of the nine board members who voted against the BOJ's surprise move to adopt minus rates to spur stubbornly low inflation and growth, also said economic and price conditions had not deteriorated enough to justify easing.

"The demerits of negative rates is that it could potentially reduce financial system stability by causing further harm to financial institutions' revenues," Mr Kiuchi said in a speech to business leaders in Kagoshima, southern Japan, on Thursday.

Adopting negative rates could backfire and work to tighten monetary conditions if banks decide to pass on the costs by charging borrowers higher rates or transaction fees, he added.

"I didn't see the need to take additional easing steps (in January) and thought negative rates should be an option the BOJ should save for the future," Mr Kiuchi said.

A former market economist, Mr Kiuchi has been a lone proponent to taper the bank's massive asset-buying programme. He has long argued that its aggressive bond buying was distorting market functions and making a future exit from the programme difficult.

The BOJ adopted negative rates last month to supplement its large-scale quantitative and qualitative easing programme as it sought to prevent volatile financial markets from hurting corporate sentiment and delaying a sustained end to deflation.

The move has pushed bond yields into negative territory, but has drawn criticism from some lawmakers for failing to boost stock prices or arrest an unwelcome rise in the yen. Critics also argue that pushing down already ultra-low borrowing costs would do little to boost capital expenditure.

Mr Kiuchi said the BOJ's super-easy monetary policy alone is insufficient to accelerate inflation to its 2 per cent target and must be accompanied by government and private-sector efforts to boost Japan's growth potential.

The BOJ should not top up asset purchases in response to short-term blips in the economy, he said, advocating instead temporary, emergency cash injection to markets if the economy faces a financial crisis.

REUTERS