October 27, 2016 5:30 am JST
BOJ Watch

Central bank heeds financial sector pleas

MOYURU BABA, Nikkei staff writer

TOKYO -- The Bank of Japan has quietly added market factors to its list of considerations when steering monetary policy, an apparent nod to financial institutions fretting over a hit to their bottom line from negative interest rates.

Speaking before a Diet committee Friday, Gov. Haruhiko Kuroda suggested early on that the central bank would hold its fire at the Oct. 31-Nov. 1 policy board meeting. "It's unlikely that there'll be any change right away," he said.

The view that further easing should be held in reserve until necessary is increasingly prevalent within the BOJ. Even though prices are sliding, not much has changed in the broader economic environment, the argument goes.

After a comprehensive review last month of its massive monetary easing program, the central bank switched its policy focus from the money supply to interest rates. The "New Framework for Strengthening Monetary Easing" released after the meeting included another hint as to the BOJ's new direction.

Policy statements through the July meeting said the central bank "will examine risks to economic activity and prices." This was altered slightly in the September release, which said the bank will "take account of developments in economic activity and prices as well as financial conditions." The last few words are key.

"If we took rates deeper into negative territory with additional easing, financial institutions' business could be affected," a BOJ insider explained. "From now on, we have to think about not just the economy and prices, but also financial conditions, to keep up momentum toward the 2% price growth target."

"Monetary policy is not for the benefit of financial institutions," Kuroda told reporters in late April. The remark was a retort to Mitsubishi UFJ Financial Group President Nobuyuki Hirano, who had publicly voiced objections to negative rates -- an unusual instance of open criticism of the BOJ in the banking industry.

The policy "will have a negative impact on financial institutions, but earnings are at historically high levels," said an unruffled central bank executive. "We conduct policy for the sake of Japan as a whole."

This was just half a year ago. Around this time, BOJ departments, worried that relationships with financial institutions would break down, started sending detailed reports to Kuroda about the impact of negative rates on banks. Top bank officials got more opportunities to visit the central bank to discuss their finances. The Financial Services Agency also expressed concern about harm to financial institutions during meetings with the BOJ and the Finance Ministry.

The central bank had considered the side effects of negative rates from the outset. But the change after September's review indicates that it sensed that the downsides were worse than expected.

"There was confusion in the BOJ after the introduction of negative rates, but it was able to correct its course with the new framework," a senior Financial Services Agency official said. Financial conditions are certain to play an important role in policy decisions going forward.

Mitsubishi UFJ Financial Group, Inc.

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