TOKYO -- The Bank of Japan has seen decidedly mixed results from its negative-rate policy announced a year ago Sunday, with businesses continuing to hoard cash even as a weakening yen boosts corporate earnings.
Mortgage rates initially fell just as the BOJ had anticipated. Monthly home loan applications at eight of the biggest Japanese banks rose to 80,000 last spring -- double the usual tally.
"The introduction of the negative-rate policy has had an unquestionable effect on home investment," a senior BOJ official said at the time. But rising interest rates after Donald Trump's election in the U.S. prompted big banks to raise borrowing costs for 10-year fixed-rate mortgages, starting this January. Loan applications have fallen to levels seen before the launch of the policy.
Something of a minibubble is developing in the rental property market amid ultralow interest rates, gung-ho lenders, and tax incentives. Rental housing starts are estimated to have topped 400,000 in 2016, the highest in eight years.
Nagano Prefecture saw a nearly 40% jump from 2015. But "a surplus of apartments is emerging due to oversupply," a real estate insider in the city of Nagano said. The nation's rental property market may suddenly cool if higher vacancy rates and declining rents become the norm.
Funds are also not moving where the BOJ would like. Bank deposits came to 694 trillion yen ($6.02 trillion) in December, up a record 6.1% on the year. Part of the trend is seen stemming from big corporations favoring parking cash on hand in deposits rather than holding negative-yielding Japanese government bonds. The central bank had hoped in vain that the subzero rates -- on some current-account deposits held by commercial financial institutions -- would nudge businesses and households toward investing.
Financial institutions face a lack of demand for funds. The negative-rate policy "has not yet led to many positive ramifications for the real economy," Japanese Bankers Association Chairman Takeshi Kunibe told reporters Jan. 19.
Shrinking margins amid lackluster lending are taking a toll on earnings at financial institutions. "A reorganization will begin in earnest among regional banks unable to withstand the negative-rate policy," a senior Financial Services Agency official predicted.
Trumping the yen
The one recent bright spot has been improved corporate earnings underpinned by the weak yen. The currency strengthened to the 99 level against the dollar last summer in the wake of the British vote to exit the European Union but has since depreciated to around 115 as of late.
American long-term rates have spiked to around 2.5% since Trump's electoral victory in November. The wider rate spread between the U.S. and Japan has put a new shine on the greenback, weakening the yen.
The BOJ added long-term-rate controls to its toolbox last September. These have been effective in softening the yen, according to a source at the central bank.
BOJ Gov. Haruhiko Kuroda had initially said it would take not even a year for the benefits of subzero rates to manifest. But the economic recovery has been on a slow footing. The bank was forced to push back the 2% inflation target date to somewhere around fiscal 2018.
"The side effect of cooler consumer sentiment amid low interest rates" has emerged strongly under the status quo, said Izuru Kato of Totan Research. While the BOJ intends to maintain the negative-rate policy, what the next corrective approach would look like is unclear.