BOJ deputy chief hints that negative rate end may be closer

BANK of Japan Deputy Governor Ryozo Himino signalled that the central bank is inching closer to putting an end to the world’s last negative interest rate regime by laying out a hypothesis for what might happen if indeed rates go positive.

While Himino reiterated a standard pledge to continue with monetary easing until the BOJ achieves its goal of sustainable inflation with wage increases, he then outlined the various potential impacts that would follow an exit from large-scale stimulus, partly by examining what happened when rates went negative.

“Today, I would like to offer one perspective by looking at what happened to net interest income for relevant sectors in the past during the transition from a state with positive interest rates to a state without them,” Himino said in a speech on Wednesday (Dec 6) to local business leaders in Oita, southwestern Japan.

Himino indicated that the first rate hike since 2007 might not be as harmful as some have feared. Himino said households would probably benefit from improved net income if rates moved to positive territory and the impact on the corporate sector would likely be limited. He also said the financial system is resilient enough to cope with that transition.

The comments were the clearest sign so far from the BOJ’s leadership that authorities are considering what the impact would be if they ended negative rates. The views will likely reinforce expectations among BOJ watchers that the bank will end negative rates by the middle of next year.

Himino appeared intent on soothing any jitters among Japanese over the prospects of ending the BOJ’s massive stimulus programme, which included taking rates negative in early 2016.

If it’s done properly, “there would be a sufficient possibility of achieving a positive outcome from the exit, since a wide range of households and firms would benefit from the virtuous cycle between wages and prices,” Himino said.

Financial institutions might face unrealised losses on holdings of long-term bonds, but they’d also have the opportunity to raise their investment yields by replacing the bonds they hold with new ones, he said.

Japan’s regional banks called on the BOJ to scrap its negative interest rate when executives met with central bank officials last month, people familiar with the matter told Bloomberg. 

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Speaking to reporters later the same day, Himino stopped short of indicating a possible timeframe for starting the exit, saying there is no preset schedule for that process and the bank will carefully assess economic conditions before embarking upon it.

At one point, market players were betting the negative rate policy would end in April. Overnight-indexed swaps now estimate the policy will end in July. Swaps show cumulative rate hikes of 21 basis points by the end of next year. BLOOMBERG