TOKYO (Reuters) - It is possible for the Bank of Japan to lower interest rates to around minus 2.0 percent without triggering an exodus into cash from bank accounts, said Kazumasa Iwata, a former BOJ deputy governor.
If the BOJ needs to ease policy again, its first two options are lowering rates further and extending the duration of government debt it already buys, said Iwata, who is currently president of the Japan Center for Economic Research, a think tank.
Iwata said it is difficult for the BOJ to increase the overall size of government debt it buys, because it would be buying debt at a loss due to a negative yield curve.
“The question of how far rates can go into negative territory is a question of how far you can go before you trigger an exodus into cash from savings accounts,” Iwata told Reuters in an interview.
“Empirical evidence indicates that it should be possible to lower rates to around minus 2.0 percent (without that happening)...”
The BOJ stunned investors last week by introducing a negative 0.1 percent interest rate to prevent concerns about a weakening global economy from derailing inflation expectations and harming sentiment.
The scheme is designed so that banks will have to pay the BOJ 0.1 percent interest on a small portion of the reserves they park at the central bank.
Initially, the negative 0.1 percent interest rate will apply to around 10 trillion yen ($84.81 billion) in reserves, but this will gradually increase over time.
The BOJ is also buying government bonds at an annual pace of around 80 trillion yen to meet its 2 percent inflation target.
The fact that the BOJ did not increase this amount at its meeting last week shows the BOJ is unlikely to expand this amount in the future, said Iwata.
Government bond yields tumbled after the BOJ’s surprise adoption of negative rates, which immediately pushed the yield curve into negative territory from the short end to around nine years.
Commercial banks reacted quickly by lowering deposit and mortgage rates. Some banks are even considering charging big companies for holding money in savings accounts.
It is still difficult to predict the economic impact, but the fact that yields, deposit and lending rates have reacted so quickly suggests the policy will lead to an increase in bank lending and capital expenditure, Iwata said.
Iwata added that he saw no risk of an asset price bubble forming because of the negative rate policy.
Commercial banks’ earnings could come under pressure because lending rates have further to fall than deposit rates, he said.
He served as deputy governor from 2003 to 2008, when the central bank exited from its first round of quantitative easing.
($1 = 117.9100 yen)
Editing by Chris Gallagher and Kim Coghill