TOKYO -- The Bank of Japan will limit the scope of its newly introduced negative interest rate to a small portion of financial institutions' current-account deposits -- between 10 trillion yen and 30 trillion yen ($84.5 billion to $253 billion), The Nikkei has learned.
The amount will represent no more than a tenth or so of the total. The BOJ reckons that even a narrow application of its new monetary easing tool will spur banks to lend and invest.
Bank shares plunged after the policy change was introduced last week. The BOJ is trying to give the stock market a sense of the size of the impact on financial industry earnings.
The rate of negative 0.1%, to take effect on Feb. 16, will initially apply to about 10 trillion yen of reserves, the BOJ announced Wednesday.
Current-account funds are expected to total 260 trillion yen in February, 210 trillion yen of which will earn interest at a 0.1% rate. Of the remainder, an initial 10 trillion yen will be subject to the negative rate, while 40 trillion yen will earn zero interest. While the total balance is expected to rise at an annual pace of 80 trillion yen, the majority of this growth will occur within the zero-interest tier.
Even a limited introduction "will put pressure in a negative direction on a broad range of interest rates," a senior BOJ official said. Indeed, yields on Japanese government debt tumbled after the policy was announced, with the benchmark two-year rate dropping to a record low of negative 0.19% Wednesday.
At the same time, the BOJ wants to minimize the impact on bank earnings. If all of financial institutions' current-account deposits were subject to a negative interest rate, their losses would top 200 billion yen a year. With a scope of 10 trillion yen to 30 trillion yen, the damage will come to 20 billion yen or so.
Since the burden on lenders will start out light, the BOJ will have some leeway to push interest rates deeper below zero if necessary -- a possibility that Gov. Haruhiko Kuroda raised in a speech Wednesday. Switzerland's central bank has gone to negative 0.75%, while its Swedish counterpart has plumbed minus 1.1%.
"If stock prices fall or the yen strengthens again, I think the BOJ will cut rates in response," a bond trader said.
But ever-falling interest rates would mean thinner and thinner profit margins for banks, potentially leaving them with less capacity or desire to lend -- not at all what the BOJ intends.
Kuroda and the rest of the policy board are expected to further refine the application of the negative interest rate at their March 14-15 meeting.