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Economy

BOJ chief opens door to deeper negative rates

Japan's central bank keeps policy unchanged despite U.S. rate cuts

The Bank of Japan on Thursday decided to keep unchanged its ultra easy monetary policy.

TOKYO -- Bank of Japan Gov. Haruhiko Kuroda on Thursday reiterated his willingness to push short-term interest rates further into negative territory, despite concerns that such a policy would hurt the banking industry and undermine economic growth.

"It is true that minus interest rates have both positive and negative effects," Kuroda said in a press conference following a two-day policy meeting during which the bank decided to leave rates unchanged. "But that doesn't mean that no further reduction is possible."

He pointed out that a deposit rate of minus 0.1% applies only to a small fraction of the funds commercial banks keep at the central bank, or 10 trillion yen ($92 billion) to 20 trillion yen out of several hundred trillion yen.

In Europe, by contrast, deposit rates at central banks are kept as low as minus 0.5%. Those rates apply to much of the funds commercial banks keep at central banks, Kuroda added.

"That alone shows there is plenty of room for further interest rate cuts," he said.

Banks have the prerogative to pass on negative rates to their customers, although no commercial bank in Japan has done so. To offset declining interest revenue, banks have been raising the fees they charge for other services.

Kuroda neither endorsed nor opposed commercial banks raising their fees. He offered a market-oriented view that fees should reflect the value of the services the banks provide to their customers.

Kuroda has stuck to a previous conviction to keep the yield curve steep, with the view that interest rates on 20-year and 30-year debt should not fall too low even if rates are cut for shorter durations. The BOJ had said previously that it expects implement such a policy until "at least through around spring 2020."

Kuroda said on Thursday that the BOJ would reduce the amount of superlong bonds it purchases, if necessary, to ensure a steep yield curve. Long-term investors such as life insurers and pension funds benefit from higher interest rates under such a policy.

Thursday's decision to keep rates steady was in line with market expectations, but follows a third straight interest rate cut in as many months by the U.S. central bank. The U.S. central bank also signaled a pause in further easing on Wednesday after deciding to lower the benchmark interest rate by one-quarter point to between 1.5% and 1.75%.

Relative calm on the financial markets, including steady share prices and dollar-yen rate, is seen to have contributed to the decision to hold rates.

The BOJ lowered its projections for growth and inflation. Japan's economy is now projected to grow 0.6% instead of 0.7% for the year ending March, while inflation is forecast at 0.7% instead of 1%.

Japan hiked its consumption tax to 10% from 8% this month to help cut its social security funding deficit. Aggressive fiscal expenditures by the government of Prime Minister Shinzo Abe have helped offset the impact of the tax increase and ease the pressure on the BOJ to act.

The central bank will increase its holding of Japanese government debt by 80 trillion yen a year and that of corporate equity by 6 trillion yen. The decision was approved by a vote of 7 to 2.

Central banks shifted toward monetary easing as global economic growth lost momentum. Economic growth in China fell to an all-time low of 6% in the July-September period. The International Monetary Fund lowered its forecast for 2019 global growth to 3%, the slowest pace since the 2008 global financial crisis.

Earlier this month, the central banks of South Korea and Indonesia cut interest rates, while the U.S. Federal Reserve lowered its policy rate.

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