Hideo Hayakawa, a former executive at the Bank of Japan (BOJ) has said that the central bank cannot overstep a 0.5 percent interest rate limit as deepening rates further could seriously undermine the country’s already fragile economy.
“The danger is that if you cut rates deeper than 0.5 percent banks might start to charge their customers fees when depositing cash. This will only serve towards hoarding of cash on the part of Japanese households, that’s the last thing we want,” said Hayakawa, who retains a close relationship with several members of the BOJ board. “In this regard we must say there should be a limit, and it is around 0.5 percent.”
Years of huge asset purchasing has failed to stimulate the stagnant Japanese economy, so the central bank switched policies recently to concentrate on targeting interest rates rather than expansion of base money.
The goal is to keep the country’s benchmark 10-year yield around the zero percent mark, utilizing the BOJ’s new “yield curve control” strategy. At the same time, the BOJ are still charging banks a small fee for parking excess funds with them, in an effort to boost corporate spending and investment.
Previous to the BOJ’s switch in policy framework, Hayakawa was one of the few experts who predicted the move, so his latest comments carry a certain amount of weight in financial circles. He is now a senior analyst at private think tank Fujitsu Research Institute.
“The tools the BOJ has at its disposal under the current framework for easing are basically cutting its bond yield target or deepening rates,” said Anthony Russell, Senior Vice President at Monex BMO Securities. “According to Hayakawa and many other analysts there is only so far they can go down with the rates, any deeper than 0.5 percent and you start to drain funds out of the banking system. So they will be concentrating on manipulating the yield curve.”
Hayakawa also mentioned that the government would tone down their bond buying should inflation pick up and said there was certainly an upper limit on how much assets they could buy.
“The long-term target rate could be flexible depending on domestic inflation figures, so we have medium to long-term sustainability with this method,” Hayakawa said.
Japanese economic officials will be at an Asian-Pacific summit in Peru next week and the BOJ are expected to send a representative to liaise with several other central banking heads.
