The BOJ, which launched a program of aggressive monetary easing in April 2013 to rid the country of 15 years of deflation, named its latest initiative to reach its 2 percent inflation target at the earliest possible time as "Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate."
Although the BOJ said the country's economy was continuing to "recover moderately," it said global financial markets had turned volatile in light of a further decline in crude oil prices and uncertainty over the prospects of emerging and commodity-exporting economies, particularly China.
"For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected," the BOJ said, adding:
"To preempt the manifestation of this risk and to maintain momentum toward achieving the price stability target of 2 percent, the Bank decided to introduce "QQE with a Negative Interest Rate."
The BOJ's new system comprises three tiers, in which the outstanding balance of each financial institution's current account will earn a positive, a negative or a zero interest rate.
A similar multi-tier system is currently used in Switzerland, Sweden and Denmark, whose central banks also have resorted to negative interest rates, mainly to reduce the incentives to hold their currencies. The European Central Bank also has a negative deposit rate in an effort to encourage financial institutions to lend funds to businesses rather than park their money at the bank.
The BOJ said its new version of QQE will lower the short end of the yield curve and exert further downward pressure on rate across the entire yield curve. It was also designed so the BOJ can pursue additional monetary easing in both quantity, quality and interest rates if necessary to achieve its inflation target.
The negative rate, which was approved by a 5-4 vote by the BOJ board, will take effect from the reserve maintenance period that starts Feb. 16.
In an update of its outlook for the economy and prices, the BOJ trimmed its forecast for growth in fiscal 2015, which ends April 1, 2016, to average 1.1 percent, down from October's forecast of 1.2 percent, while the forecast for consumer price inflation, less fresh food, was steady at 0.1 percent.
For fiscal 2016, the growth forecast was revised up to 1.5 percent from 1.4 percent while the forecast for inflation was lowered to 0.8 percent from 1.4 percent.
For fiscal 2017 the forecast for growth was unchanged at 0.3 percent. On April 1, 2017, the government plans to raise sales taxes further to 10 percent and the forecast for inflation excluding the tax was steady at 1.8 percent. Including the tax, inflation was seen rising to 2.8 percent, below October's forecast of 3.1 percent.
The BOJ's board also confirmed that it would continue with the previous target of purchasing Japanese government bonds so their amount rises by an annual pace of about 80 trillion yen along with annual purchases of exchange-traded funds and real estate investment trusts so their amounts outstanding rises at an annual pace of about 3 trillion and about 90 billion yen, respectively.
The BOJ also confirmed that it would continue purchasing commercial paper and corporate bonds at amounts of about 2.2 trillion yen and 3.2 trillion.
Japan's headline inflation rate eased to 0.2 percent in December from November's 0.3 percent while the country's Gross Domestic Product expanded by an annual 1.6 percent in the third quarter, up from 0.7 percent in the second quarter.
The Bank of Japan issued the following statement:
1. At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to
introduce "Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest
Rate" in order to achieve the price stability target of 2 percent at the earliest possible time.
Going forward, the Bank will pursue monetary easing by making full use of possible
measures in terms of three dimensions; quantity, quality, and interest rate.
(1) Interest-Rate Dimension: The introduction of a negative interest rate by a 5-4 majority vote[Note 1]
The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank.1 It will cut the interest rate further into negative territory if judged as necessary.
Specifically, the Bank will adopt a three-tier system in which the outstanding balance of each financial institution's current account at the Bank will be divided into three tiers, to each of which a positive interest rate, a zero interest rate, or a negative interest rate will be applied, respectively (see Attachment for details).2
The Bank will carry out the Loan Support Program, the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas affected by the Great East Japan Earthquake, and the Funds-Supplying Operations against Pooled Collateral at zero interest rates.
2 A multiple-tier system is intended to prevent an excessive decrease in financial institutions' earnings
stemming from the implementation of negative interest rates that could weaken their functions as
financial intermediaries. Multiple-tier systems are adopted in countries where the size of negative
interest rates is relatively large, including Switzerland (minus 0.75 percent), Sweden (minus 1.1 percent),
and Denmark (minus 0.65 percent).
(1) Interest-Rate Dimension: The introduction of a negative interest rate by a 5-4 majority vote[Note 1]
The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank.1 It will cut the interest rate further into negative territory if judged as necessary.
Specifically, the Bank will adopt a three-tier system in which the outstanding balance of each financial institution's current account at the Bank will be divided into three tiers, to each of which a positive interest rate, a zero interest rate, or a negative interest rate will be applied, respectively (see Attachment for details).2
The Bank will carry out the Loan Support Program, the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas affected by the Great East Japan Earthquake, and the Funds-Supplying Operations against Pooled Collateral at zero interest rates.
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(2) Quantity Dimension: The guideline for money market operations
The Bank decided, by an 8-1 majority vote, to set the following guideline for money market operations for the intermeeting period:[Note 2]
The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.
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(3) Quality Dimension: The guidelines for asset purchases
With regard to the asset purchases, the Bank decided, by an 8-1 majority vote, to set the following guidelines:[Note 2]
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a) The Bank will purchase Japanese government bonds (JGBs) so that their amount
outstanding will increase at an annual pace of about 80 trillion yen.3 With a view to
encouraging a decline in interest rates across the entire yield curve, the Bank will
conduct purchases in a flexible manner in accordance with financial market
conditions. The average remaining maturity of the Bank's JGB purchases will be
about 7-12 years.
-
b) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate
investment trusts (J-REITs) so that their amounts outstanding will increase at annual
paces of about 3 trillion yen4 and about 90 billion yen, respectively.
-
c) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at
about 2.2 trillion yen and about 3.2 trillion yen, respectively.
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a) The Bank will purchase Japanese government bonds (JGBs) so that their amount
outstanding will increase at an annual pace of about 80 trillion yen.3 With a view to
encouraging a decline in interest rates across the entire yield curve, the Bank will
conduct purchases in a flexible manner in accordance with financial market
conditions. The average remaining maturity of the Bank's JGB purchases will be
about 7-12 years.
-
(4) The continuation of "QQE with a Negative Interest Rate"
The Bank will continue with "QQE with a Negative Interest Rate," aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine risks to economic activity and prices, and take additional easing measures in terms of three dimensions -- quantity, quality, and interest rate -- if it is judged necessary for achieving the price stability target.[Note 3]
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Japan's economy has continued to recover moderately, with a virtuous cycle from income to
spending operating in both the household and corporate sectors, and the underlying trend in
inflation has been rising steadily. Recently, however, global financial markets have been
volatile against the backdrop of the further decline in crude oil prices and uncertainty such as
over future developments in emerging and commodity-exporting economies, particularly the
Chinese economy. For these reasons, there is an increasing risk that an improvement in the
business confidence of Japanese firms and conversion of the deflationary mindset might be
delayed and that the underlying trend in inflation might be negatively affected.
-
To preempt the manifestation of this risk and to maintain momentum toward achieving the
price stability target of 2 percent, the Bank decided to introduce "QQE with a Negative
Interest Rate." The Bank will lower the short end of the yield curve by slashing its deposit
rate on current accounts into negative territory and will exert further downward pressure on
interest rates across the entire yield curve, in combination with large-scale purchases of JGBs.
In addition, this policy framework is designed to enable the Bank to pursue additional
monetary easing in terms of three dimensions, combining a negative interest rate with
quantity and quality. By making full use of "QQE with a Negative Interest Rate," the Bank
will achieve the price stability target of 2 percent at the earliest possible time.
-
Japan's economy has continued to recover moderately, with a virtuous cycle from income to
spending operating in both the household and corporate sectors, and the underlying trend in
inflation has been rising steadily. Recently, however, global financial markets have been
volatile against the backdrop of the further decline in crude oil prices and uncertainty such as
over future developments in emerging and commodity-exporting economies, particularly the
Chinese economy. For these reasons, there is an increasing risk that an improvement in the
business confidence of Japanese firms and conversion of the deflationary mindset might be
delayed and that the underlying trend in inflation might be negatively affected.
1 A negative interest rate of minus 0.1 percent will be effective from the reserve maintenance period, which
commences from February16, 2016.
3 As before, the Bank will not set a lower bound for yields on its JGB purchases. Thus, the Bank can
carry out outright purchases of JGBs with negative yields lower than minus 0.1 percent.
4 In addition to the current program of ETF purchases, the Bank will commence purchasing ETFs under a new program from April 2016 at an annual pace of about 300 billion yen, which was decided at the Monetary Policy Meeting on December 17 and 18, 2015. Under this new program, the Bank will purchase ETFs composed of stocks issued by firms that are proactively investing in physical and human capital.
4 In addition to the current program of ETF purchases, the Bank will commence purchasing ETFs under a new program from April 2016 at an annual pace of about 300 billion yen, which was decided at the Monetary Policy Meeting on December 17 and 18, 2015. Under this new program, the Bank will purchase ETFs composed of stocks issued by firms that are proactively investing in physical and human capital.
[Note 1] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. Y. Harada, and Mr. Y. Funo.
Voting against the action: Ms. S. Shirai, Mr. K. Ishida, Mr. T. Sato, and Mr. T. Kiuchi.
The members voting against the action gave the following reasons: Ms. S. Shirai expressed concerns
that introducing a negative interest rate immediately after the introduction of supplementary
measures for QQE might be misunderstood as reaching a limit to the Bank's asset purchases and that
such a complex policy framework could cause confusion; Mr. K. Ishida considered that a further
decline in JGB yields would not have significantly positive effects on economic activity; Mr. T. Sato
considered that a negative interest rate should be introduced when the Bank slows down the pace of
increase in the monetary base; and Mr. T. Kiuchi considered that introduction of a negative interest
rate, which would adversely affect smooth conduct of the Bank's JGB purchases, would only be an
appropriate policy measure in a crisis situation.
[Note 2] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Ms. S. Shirai, Mr. K. Ishida, Mr. T. Sato, Mr. Y. Harada, and Mr. Y. Funo. Voting against the action: Mr. T. Kiuchi. Mr. T. Kiuchi proposed that the Bank will conduct money market operations and asset purchases so that the monetary base and the amount outstanding of its JGB holdings will increase at an annual pace of about 45 trillion yen, respectively. The proposal was defeated by a majority vote.
[Note 2] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Ms. S. Shirai, Mr. K. Ishida, Mr. T. Sato, Mr. Y. Harada, and Mr. Y. Funo. Voting against the action: Mr. T. Kiuchi. Mr. T. Kiuchi proposed that the Bank will conduct money market operations and asset purchases so that the monetary base and the amount outstanding of its JGB holdings will increase at an annual pace of about 45 trillion yen, respectively. The proposal was defeated by a majority vote.
[Note 3] Mr. T. Kiuchi proposed that the Bank will, with the aim to achieve the price stability target of 2
percent in the medium to long term, continue with asset purchases and a virtually zero interest rate
policy as long as each of these policy measures is deemed appropriate under flexible policy conduct
based on the examination from the two perspectives of the monetary policy framework. The
proposal was defeated by an 8-1 majority vote. Voting for the proposal: Mr. T. Kiuchi. Voting
against the proposal: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Ms. S. Shirai, Mr. K. Ishida,
Mr. T. Sato, Mr. Y. Harada, and Mr. Y. Funo."
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