November 16, 2018 / 5:30 AM / 2 years ago

BOJ paper identifies flaws of negative rates as debate on stimulus cost brews

TOKYO (Reuters) - A think-tank affiliated with the Bank of Japan has issued an academic paper arguing that ditching negative interest rates could help accelerate inflation, a sign debate within the bank about the rising cost of prolonged monetary easing is growing.

FILE PHOTO: A Japanese flag flutters on the Bank of Japan building in Tokyo, Japan, March 15, 2016. REUTERS/Toru Hanai/File Photo

While the paper does not represent the official central bank view, it has been interpreted by some market participants as a sign the BOJ is becoming more open to debating a future exit from its massive stimulus program.

“The paper likely won’t have major policy implications for near-term monetary policy,” said Ryutaro Kono, chief Japan economist at BNP Paribas.

“But there’s a good chance some of this research could affect the policy debate within the BOJ board,” he said.

The academic paper by Junko Koeda, a Waseda University professor who is not BOJ staff, uses economic models to simulate how hiking nominal interest rates to zero percent from minus 0.1 percent could affect the economy and inflation.

The findings show that keeping rates negative for a long period would have little effect in pushing up inflation, when the central bank has limited policy ammunition to stimulate the economy.

“A ‘liftoff,’ which occurs when the net policy rate becomes positive, can be expansionary if it triggers the economy to move to a better state,” the paper said, arguing that abandoning negative rates could have a positive effect on price growth.

The BOJ introduced negative rates in 2016. It now guides short-term rates at minus 0.1 percent and long-term rates around zero percent to achieve its elusive 2 percent inflation target.

Subdued inflation has forced the BOJ to maintain the radical stimulus program despite the rising costs, such as the hit to financial institutions’ profits from years of near-zero rates.

Negative rates have been particularly unpopular among financial institutions for narrowing their margins.

The paper is among various research notes written by academics and published the BOJ’s think-tank, which is not directly involved in monetary policy decisions.

The research notes are closely watched in markets as some had proved to offer hints on the BOJ’s policy direction, or at least shed light on what the central bank is interested in.

Reporting by Leika Kihara; Editing by Sam Holmes

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