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Economy

Japan's central bankers mull diminishing returns from bond buying

TOKYO -- Some in the Bank of Japan are growing anxious about continuing its massive purchases of government bonds, confronted with the program's negative side effects.

     Pressure from the financial industry is strengthening by the day, according to high-ranking officials at the central bank.

     The BOJ's buying of huge amounts of Japanese government bonds has pushed long-term interest rates to unprecedented lows. This has made it impossible for insurance companies to generate sufficient returns on JGB investments to pay benefits to policyholders.

     Nippon Life Insurance will thus raise premiums on lump-sum whole life policies in February. And Fukoku Mutual Life Insurance is considering halting sales of lump-sum endowment insurance and other products.

     The longer ultralow interest rates continue, the more likely other insurers are to take similar steps. Household finances would suffer.

     Money reserve funds, used for parking individual stock investors' unused funds, are another financial product hit by ultralow interest rates. MRFs put money into short-term government bonds and other safe investments. Generating positive returns on the bonds is becoming nearly a lost cause because negative yields have become the norm for not only short-term government debt, but also two-year JGBs.

     With five-year JGBs at zero for the first time Tuesday, "it could become impossible to offer a positive interest rate any moment now," an MRF manager says.

Pushing on a string

The BOJ has discussed these costs at its policy board. When the board took up additional easing measures in a late-October meeting, some members raised the specter of hurting earnings at financial institutions and giving the impression that the bond-purchasing program is actually a scheme to enable deficit spending. The board decided to step up the program anyway, judging the benefits to outweigh the costs.

     But the benefits have started to fade. With loan margins already crushed by ultralow interest rates, banks have little room to cut lending rates even if JGB yields sink further. And yields on corporate bonds "have started decoupling from the continued march toward further lows by government bond yields," a brokerage analyst says.

     Even within the central bank, more are now coming to believe that the additional benefits of further easing the interest rate channel are clearly diminishing.

     "Since nominal interest rates are already at historically low levels, the marginal impact of more easing aimed at putting upward pressure on consumer prices is not strong," policy board member Takehiro Sato said in a speech last month, explaining why he opposed additional easing in October.

     While lower crude oil prices are pushing down consumer prices for now, the BOJ maintains that inflation will pick up again in the second half of fiscal 2015, aided by wage hikes and other factors.

     "We have caused tremendous trouble for the financial industry," a BOJ official says. "I hope we will be able to scale back monetary easing soon by achieving the price stability target as projected."

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