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Banking & Finance

Bank of Japan's 'deeper' negative rates would hit consumers

Banks expected to charge deposit fees to manage accounts

Bank of Japan Gov. Haruhiko Kuroda told Nikkei that cutting interest rates is "always an option" for dealing with a downturn. (Photo by Wataru Ito)

TOKYO -- The Bank of Japan has signaled that it could send rates deeper into negative territory, a move that threatens to trickle down to businesses and consumers if struggling banks respond by imposing their own "negative rates" through account fees.

Gov. Haruhiko Kuroda suggested in a Thursday interview with Nikkei that lowering the central bank's policy rate beyond the current level of minus 0.1% is "always an option" in the event of an economic turn for the worse.

The BOJ's negative-rate policy is intended to push banks to lend or invest capital by essentially penalizing them for depositing funds with the central bank, with the goal of creating a positive economic cycle. And a decline in lending rates has indeed encouraged companies to borrow.

But it has been tough on banks, which have been unable to cut rates on customer deposits below zero to compensate for the decline in the rates they charge borrowers. The average interest rate financial institutions pay on ordinary deposits now stands at 0.001%, meaning that a customer would need to deposit 1.2 billion yen ($11.2 million) to earn an after-tax yield of just 10,000 yen.

The spread between the lending and deposit rates -- a major source of profit for banks -- has narrowed precipitously, and around 40% of 105 regional banks are bleeding red ink in their main business, according to the Financial Services Agency.

If the BOJ cuts its policy rate further below zero, squeezed banks could introduce fees on deposits to eke out profits. With next to no interest being paid out to customers, such charges would amount to negative deposit rates.

In February 2016, just after the central bank announced its negative-rate policy, Kuroda told parliament that there was no possibility of deposit rates falling below zero. But BOJ policy board member Hitoshi Suzuki touched on the prospect of "virtually negative" deposit rates in a speech last month.

"In this case, some firms may prefer to proceed with debt repayment in an effort to reduce their deposits, and this could contribute to a decline in the amount of bank loans," Suzuki said.

Such a situation could also "have an adverse effect on economic activity through a deterioration in consumer sentiment," he added.

So far, the pain that negative interest rates have caused the banking industry has not aroused much sympathy or interest from the public. This could change if the burden shifts to their shoulders.

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