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Interview

Kuroda says cutting rates 'further into negative' an option

Bank of Japan chief sees 'firm' domestic demand, but warns of trade war headwinds

Bank of Japan Gov. Haruhiko Kuroda said downside risks from the trade war have heightened and he "can't rule out" a further downturn in the global economy. (Photo by Wataru Ito)

TOKYO -- Cutting interest rates "further into the negative zone is always an option" for the Bank of Japan, Gov. Haruhiko Kuroda told Nikkei, as the central bank grows increasingly concerned about mounting downside risks to the global economy from the U.S.-China trade war. He said rate cuts are one of the four options BOJ has presented before.

In its statement after July's policy board meeting, the BOJ had signaled a willingness to consider preemptive easing if necessary. "The Bank will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost," the statement said.

Kuroda suggested in an interview on Sept. 5 that circumstances have not worsened enough to merit such steps at this point. He maintained a bullish stance on Japan's economy, asserting that "we're maintaining momentum toward the price stability target" of 2% inflation and that "domestic demand -- consumer spending and capital investment -- are relatively firm."

But he stressed that "caution is needed" in light of unpredictable conditions overseas, particularly with regard to the trade war.

While saying he considers it unlikely that the U.S. will enter a serious recession, Kuroda noted a slowdown in the global economy, centered on Europe and China.

"I can't rule out the possibility that it will worsen further," he said.

The U.S. and the European Union are starting to change course on monetary policy after moves toward tightening. The Federal Reserve cut interest rates for the first time in more than a decade in July, and the European Central Bank is widely expected to take steps in the same direction at this month's meeting.

The BOJ, meanwhile, implemented a massive easing program more than six years ago under Kuroda and has kept policy loose since. The bank has laid out four policy options it can take in the event of a turn for the worse: cutting the short-term policy rate, lowering its target for long-term rates, stepping up asset purchases and accelerating expansion of the monetary base.

"We're considering a variety of possibilities, including combinations of these and improved versions," Kuroda said.

At the same time, he signaled again that the central bank is taking the side effects of its policies into account. "We will take the most appropriate easing measures after comprehensively considering their merits and drawbacks, so as to not hinder financial intermediation or market functioning" and to minimize the impact on the financial system, he said.

Even so, Kuroda stated that cutting the policy rate beyond the current level of minus 0.1% -- seen as a tough ask, given the damage that ultralow rates have inflicted on financial institutions' profits -- remains on the table.

Interest rates are falling worldwide as the trade dispute escalates, and Japan has not been immune to the trend.

Ten-year rates have settled well below the level of "around zero" targeted by the BOJ in its yield curve control policy, even considering that the central bank has indicated it will tolerate rates 20 basis points above or below that level. The yield on benchmark newly issued 10-year Japanese government bonds sank to minus 0.295% on Sept. 4, the lowest level in more than three years.

Kuroda suggested that the BOJ will accept this state of affairs for the time being. But he hinted that this tolerance would not be unlimited, while avoiding drawing a specific line in the sand.

"If there's no limit at all, the interest rate target of 'around zero' will become meaningless," he said.

The central bank chief spoke more clearly about yields on ultralong-term debt with maturities of 20 or 30 years, saying they have "fallen a bit too far."

"Returns for life insurers and pension funds have declined significantly, and it has a negative impact on consumer sentiment," he said.

Here as well, Kuroda indicated awareness of the risks of further easing. "Of course, we'll adjust the volume and timing of our ultralong bond market operations as necessary," he said.

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