May 28, 2019

BoJ likely to venture into negative rate financing in the next deflationary cycle.

This is a summary of an opinion editorial published on Financial Times by our Chief Economist, Takuji Okubo, "Japan’s dormant central bank may have to rouse itself once more", May 28th, 2019.

What more can the Bank of Japan do? This is the question economists in Japan have long grappled with. In the past 20 yrs, the BoJ has been a trailblazer of unconventional monetary policies such as zero interest rate and quantitative easing. As recession risk looms for Japan, the bank has to find a new answer to the question, again. In our view, lowering its policy rate has to be the answer, especially to counter the risk of a sharp yen appreciation. One obstacle against the move is the concern that a lower and flatter yield curve would ruin banks' already fragile profitability. In order to circumvent the dilemma, the BoJ will need to start financing banks at a negative rate, effectively providing a subsidy for banks to keep lending.

If you have an FT subscription, I hope you enjoy the article. If not, we will be publishing an expanded report on the subject soon, how the mechanism would work and its financial constraint it will place on the BoJ.

BoJ already owns nearly 50% of the Japanese government bonds outstanding.