Bank of Japan maintains negative interest rates, to government’s chagrin

The Bank of Japan has decided to maintain its negative interest rate policy against the wishes of the Abe government

The Japanese central bank has decided to keep interest rates at their current negative level and emphasised its moderately positive economic outlook.

In a move widely anticipated by commentators and analysts the Bank of Japan has continued its current monetary settings, keeping its short-term interest rate target at -0.1 per cent, with 10-year government yields at around 0 per cent.

While interest rates are at historic lows around the world, the experiment of negative interest rates has only been trialled by a number of countries since the global financial crisis of 2008.

However, just as the BoJ announced its decision to stick with the policy, one of its earliest advocates, Sweden, raised interest rates to zero. The Riksbank, the oldest central bank in the world, bowed to mounting concern that: “the behaviour of economic agents may change and negative effects may arise.”

Such potential negative consequences have been emphasised by Koichi Hamada, a key economic advisor to Japanese prime minister Shinzo Abe.

The chief architect of ‘Abenomics’ opined earlier this week in an interview with Reuters: "Negative interest rates hurt, particularly smaller financial institutions' health, so the BOJ must try to avoid a situation where interest rates reach a level deemed as a reversal rate.”

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He added: "There are limits to how much the BOJ can fine-tune the yield curve. In such cases, it's necessary for fiscal policy to coordinate with monetary policy in such a way as to push up real and nominal interest rates."

With annualised GDP growth of 1.8 per cent in the third quarter of 2019 the BoJ will likely think that its policy is working. The central bank did recognise that Japan’s factory output was weaker than years previous but denied any culpability, instead citing environmental factors. It stated: "Industrial production is falling due mainly to natural disasters."

FURTHER READING: Japan announces larger than expected stimulus measures

FURTHER READING: Japan’s economy almost stalls as exports suffer

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