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Economy

BOJ faces beer drinker's dilemma on negative rates

Kuroda risks leaving Japan hungover with his monetary policy

Beer offers many valuable lessons -- including on monetary policy.   © Reuters

TOKYO -- Japan's economic professors frequently draw on a common saying as a metaphor to teach students about diminishing returns: The first beer of the night is incredibly satisfying, the second one not as much.

Now this lesson is playing out in Japan's monetary policy, as the Bank of Japan weighs taking interest rates further into negative territory even as lenders approach their hard lower limit of 0%.

"We have a special contractual agreement to hold lending rates at zero even if the Tokyo interbank offered rate goes negative," said Concordia Financial Group President Kenichi Kawamura at an earnings conference on Monday. Concordia is the parent of The Bank of Yokohama.

Banks often lend to companies at a set premium above Tibor. This means that when the interbank rate falls, lending rates fall too.

The three-month Tibor stands at 0.6727%, "If we bring interest rates further into the negative, Tibor will enter negative territory as well," a central bank official said.

In reality, Japanese banks do not have the option of lending at negative rates. The Financial Law Board, an advisory body of lawyers sponsored by the BOJ, issued an opinion in February 2016 that banks should not lend money at negative rates. Since borrowers pay interest as a price for financing, negative rates just mean that they no longer have to pay this price, the board concluded.

BOJ Gov. Haruhiko Kuroda has hinted that more easing could be in the offing. The fact that the interest rate is at minus 0.1% "doesn't mean that no further reduction is possible," he said last month after the latest policy meeting.

Negative rates are intended to lower the hurdle for borrowing and spur economic activity. But once lending rates hit the floor at zero, there is limited benefit from pushing interest rates further into negative territory.

In addition, most outside the central bank believe even the current rates do almost nothing to boost financing demand among companies that don't borrow money. Kuroda said Japan won't see the same benefits from going deeper into negative rates as the European Union, where lending rates are not yet as close to 0%.

Too much beer not only brings diminishing enjoyment but also a hangover. "We are not limiting our options for further easing to lowering interest rates," Kuroda said, leaving the door open for other policy tools as the BOJ approach a crossroads.

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