TOKYO Bank of Japan (BOJ) officials have been scurrying to commercial banks to explain and apologize for its surprise adoption of negative interest rates in January, while Prime Minister Shinzo Abe has distanced himself from a decision that is proving unpopular with the public.
Some officials close to the premier say it could cause a rift in his once close relationship with BOJ Governor Haruhiko Kuroda, whose radical stimulus measures have so far failed to lift Japan clear of two decades of deflation and stagnation.
A government press relations official said there was nothing to add beyond remarks made publicly by Chief Cabinet Secretary Yoshihide Suga that no such rift exists. A BOJ spokesman declined to comment.
With the economy shrinking again and prices flat, Abe has already announced he will set up a panel to consider fresh budget spending to provide the stimulus that monetary policy has struggled to achieve.
The controversy over the negative rates move, which unlike his previous eye-catching policy steps was not welcomed by Japan's stock market, comes even as Kuroda is on the verge of gaining greater control of the bank's nine-member board. Two skeptics of his stimulus program are stepping down in the coming months.
The diminishing returns from his preferred modus operandi of market-shocking measures will leave him little option but to revert to the drip-feed easing he derided in his predecessor Masaaki Shirakawa if inflation fails to pick up, some analysts say.
"Given the confusion caused by the January move, I don't think the BOJ will be able to cut rates again for the time being," said Hideo Kumano, a former BOJ official who is now chief economist at Dai-ichi Life Research Institute.
"The BOJ may instead expand asset purchases in small installments. That would be returning to the incremental approach of easing Kuroda dismissed in the past as ineffective."
Mandated by Abe to transform the risk-shy BOJ, Kuroda delighted markets and silenced skeptics within the bank by deploying a massive money-printing program, dubbed "quantitative and qualitative easing" (QQE), in April 2013.
The Tokyo stock market soared and the yen tumbled, giving exporters a boost, and Japanese growth and inflation registered a pulse.
He struck again in October 2014 with a big expansion of QQE, though the market boost was smaller, price rises were already moderating and the economy was taking a step back for every step forward.
But the late-January rates decision failed to reverse a rise in risk-aversion that was hitting stocks and forcing up the yen, traditionally a safe haven in times of market stress.
Bank shares fell sharply.
Like Shirakawa, who faced frequent grilling by lawmakers for doing too little too late to beat deflation, Kuroda is now summoned to parliament almost daily. Opposition lawmakers brand negative rates a policy failure that confused, rather than calmed, jittery financial markets.
Tabloids warned people to defend their deposits from the risk of a bank run, while talk shows ran features on the threat to family savings.
Abe, who used to praise Kuroda's BOJ for taking bold steps to eradicate deflation, distanced himself from the policy, telling parliament on March 7 that the decision was "of the bank's own making".
Masahiko Shibayama, an adviser to Abe, said there had been "quite a bit of confusion" in markets.
"I hope the BOJ calmly analyses the impact negative interest rates have had, which should feed into their decision about the next steps to take," he told Reuters this month, signaling the administration's distaste for further cuts.
Sources told Reuters the BOJ was set to discuss exempting some funds from the negative rates, after the securities industry warned that investment money would be driven into bank deposits, which would not help Abe's hopes of getting cash put to more productive use to boost the economy.
Except for an elite handful, even BOJ officials were left in the dark about the January decision.
Many officials are now being kept busy defending the policy to lawmakers and private banks furious that Kuroda deployed the "shock and awe" tactic just days after denying such a move was a possibility.
Top BOJ executives are visiting the big banks to brief them on negative rates, a reversal of the normal course of events, which would usually see private bankers visiting BOJ headquarters, say officials with direct knowledge of the matter.
Outside of Tokyo, BOJ branch managers are holding meetings with regional banks to calm executives angered by the impact that negative rates are having on their already slim lending margins.
"The first thing we do is to apologize for the confusion," said one BOJ branch manager. "The scene isn't nice."
Banks, brokers and officials say some financial institutions are having to manually enter orders as their computer systems can't yet handle negative-rate transactions.
While many BOJ officials are wary of expanding monetary stimulus again soon, their hands may be forced as soft domestic consumption and global demand threaten to derail a fragile economic recovery.
The BOJ is set to cut its growth and price forecasts again at a quarterly review in April, sources have told Reuters, which would heighten calls for more stimulus.
Kuroda has said that negative rates combined with QQE give the BOJ more powerful weaponry, but the likelihood is that he will be unable to deliver much of a blast from either barrel.
January's action has queered the pitch for further rate cuts, and his scope for stimulating the economy by acting in the bond markets – the main mechanism for QQE - is limited, analysts say, because the central bank is already gobbling up a quarter of the entire Japanese government bond (JGB) supply.
"QQE was intended to deliver all available steps in a single blow, which means the BOJ really doesn't have many tools left in the first place," said Izuru Kato, chief economist at Totan Research and a long-time BOJ watcher.
"The BOJ will probably keep saying that there's plenty of room to ease more," said one source familiar with the bank's thinking. "But there are clearly limits to what monetary policy alone can do."
(Additional reporting by Yoshifumi Takemoto and Sumio Ito; Editing by Will Waterman)