Kuroda Remains Wary Over Deeper Negative Rates Like Lagarde

(Bloomberg) -- Bank of Japan Governor Haruhiko Kuroda’s actions once again showed his wariness over taking interest rates further below zero, despite yet another wave of hefty cuts from global central banks in response to the coronavirus pandemic.

Like European Central Bank chief Christine Lagarde last Thursday, Kuroda opted for more asset purchases rather than rely on the biggest tool at the BOJ’s disposal: its short-term rate.

That’s a reflection of how much pain the banking sector is feeling as its profits are squeezed by the negative benchmark, with little in the way of inflation to show for the discomfort. Lagarde said last week that a more surgical approach than a rate cut was needed to help at the micro level in the face of the virus.

While an apparent doubling of the pace of the bank’s buying of exchange-traded funds to 12 trillion yen ($113 billion) a year seemed to lift markets at first, the response soon cooled as investors realized that putting a high bar on how much the BOJ can buy is largely an extension of its existing flexibility on purchases.

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The BOJ’s decision, brought forward by three days amid escalating fears of the virus, was among a wave of unscheduled actions Monday following a whopping 1 percentage-point rate cut by the Federal Reserve at the weekend.

New Zealand’s central bank slashed its benchmark by 75 basis points, and the Bank of Korea cut its key interest rate by 50 basis points. The Reserve Bank of Australia, which already lowered its cash rate earlier this month, said it will boost liquidity in short-term funding markets.

Leaders from the Group of Seven nations are set to discuss their virus response on a teleconference later Monday. Central bankers and investors have pressed governments to do more to support their economies given monetary ammunition is running low, and because fiscal policy can be targeted at corners of an economy that need it most.

Fed Chair Jerome Powell has suggested negative rates aren’t an option in the U.S., and Kuroda’s refusal to pull the trigger on a step further below zero left many economists wondering if he ever will.

“I don’t think negative rates is a viable option anymore but, the just like the ECB, the BOJ can’t say that. Kuroda and Lagarde are suffering from the same limitation that they have no real room for cutting rates further,” said Kyohei Morita, chief Japan economist at Credit Agricole Securities Asia BV.

Both Lagarde and Kuroda know that fiscal policy must play a larger role, he added.

At his news conference, Kuroda denied that the BOJ had reached its limit with the negative rate at -0.1%.

“It’s true there’s a concern over directly squeezing the profitability of banks if we cut rates deeper, but if the reduction helps the economy and it expands, well that’s not necessarily negative for profitability,” Kuroda said.

Doubling Up

Earlier in the day, the BOJ said it would buy more assets including corporate bonds, and offer a new zero-interest rate loan program to ensure companies had the financing they needed to help prop up sentiment and maintain stability in markets.

Placing an upper limit of 12 trillion yen on ETF purchases looked less impressive compared with the annualized pace of buying in the first half of March. Already before Monday’s meeting, the BOJ bought ETFs at an annualized pace of 14.9 trillion yen.

What Bloomberg’s Economist Says...

“The Bank of Japan’s ETF purchase was already very flexible even before the today’s announcement of the step-up of its purchases. The pace of annualized ETF purchase sometimes hit the 10 trillion yen mark while also slowing to a 2 trillion pace. Reconfirmation of what is essentially the existing policy framework may have resulted in some disappointment in markets.”

--Yuki Masujima. Click here to read more.

The decision to raise ETF purchases helped lift stocks in the minutes after the announcement, though gains were soon pared back. The yen weakened against the dollar at first before heading back in the opposite direction to strengthen a touch.

“This is the best the BOJ could do at this point. The BOJ has always proved that it had sufficient tools by coming up with new ones but this time there was nothing new,” Masaaki Kanno, chief economist at Sony Financial Holdings and former BOJ official. “The hopes for another bit of BOJ magic have been dashed.”

--With assistance from Yuko Takeo, Yoshiaki Nohara, Shoko Oda, Keiko Ujikane, Kazunori Takada and Emi Urabe.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;Sumio Ito in Tokyo at sito58@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jason Clenfield, Paul Jackson

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