Why is Japan's monetary policy so unpopular with banks?
TOKYO, Sept 19 (Reuters) - Japan's central bank has been
pursuing quantitative easing for the past five years to spur
consumption in the world's third largest economy, but its
policies have also made it unpopular with banks due to pressure
on their earnings.
WHAT POLICIES HAS THE BOJ PUT IN PLACE?
The Bank of Japan has been buying large volumes of
government bonds in the open market to lower long-term bond
yields. It also has a negative interest rate policy, which keeps
short-term yields at minus 0.1 percent.
WHY IS THE BOJ DOING THIS?
The BOJ is doing this to meet its 2 percent inflation
target, which it says is necessary to prevent a return to
deflation that plagued the economy for nearly two decades.
HOW IS THE POLICY SUPPOSED TO WORK?
Quantitative easing pushes down yields and interest rates,
which in theory encourages borrowing and pushes up consumer
WHAT WENT WRONG FOR THE BANKS?
The first sign of trouble came shortly after the BOJ began
quantitative easing in April 2013.
The BOJ's government debt purchases were so large that they
crowded out participation from other banks and investors.
Trading volumes fell and there were even days when certain
government bonds went untraded.
As a result, investment banks earned less in commissions
from bond trading.
HOW DID NEGATIVE RATES AFFECT THE BANKS?
The BOJ adopted negative interest rates in January 2016 by
charging banks 0.1 percent on a small portion of their reserves.
Traditionally, commercial banks lend money to some customers
and use the interest from those loans to pay out interest on
savings deposits. The difference between interest earned from
loans and interest paid on deposits is called the margin.
When margins are large, it is easy for banks to turn a
The negative interest rate policy, however, cut margins in
half, and it became more difficult for banks to make money.
WHAT HAPPENED TO BOND YIELDS?
The yield spread, or the difference between yields on 2-year
and 10-year government debt collapsed in 2016 as yields on both
tenors went into negative territory.
Investors typically rely on big moves between short- and
long-term yields to make money. When the yield spread narrows,
this becomes more difficult. Investors also lose money when they
buy bonds with negative yields.
Banks and some economists began to worry that negative
long-term yields would discourage more investors from trading
HOW HAVE NEGATIVE INTEREST RATES IMPACTED FINANCIAL
Since the policy began in January 2016, negative rates have
cost banks on average around 95 billion yen ($849.66 million) in
interest paid on reserves, according to Reuters calculations
based on BOJ data.
Some analysts say banks may have lost even more money due to
the decline in lending rates caused by negative interest rates.
HAS THE BOJ ADDRESSED THESE CONCERNS?
In September 2016, the BOJ said it would allow 10-year bond
yields to trade around zero percent with a new policy called
yield curve control.
This helped pull 10-year yields out of negative territory,
but the BOJ would only allow 10-year yields to move in a narrow
range of 0.1 percent above and below zero.
However, moves in bond yields were so small that trading
Short-term rates remained in negative territory, making it
difficult to earn money from lending. As a result, bank earnings
are down 20 percent from their peak in fiscal 2014.
In July, the BOJ said it would double the range for 10-year
bond yields to 0.2 percent and lower the amount banks have to
pay because of negative rates, but industry leaders say monetary
policy is still hurting banks.
($1 = 111.8100 yen)
(Reporting by Stanley White; Editing by Sam Holmes)
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