BOJ board debated rolling back negative rates at March meeting

TOKYO / Reuters

Bank of Japan (BOJ) policymakers engaged in heated debate during their policy review in March on the pros and cons of their decision in January to adopt negative interest rates, with one even saying it was preferable to roll it back.
A summary of the March 14-15 meeting of the nine-member board that was released on Thursday showed some warned of weak inflation expectations and persistent overseas headwinds even after the surprise January action.
The dissenters were not named, but their reservations highlighted the problems the central bank faces trying to boost growth and reflate the economy with dwindling policy ammunition.
“It’s preferable to roll back the negative rate policy. But abandoning it immediately after introducing it would cause market confusion and risk eroding trust in the BOJ. With the effects still not clear, we should maintain the policy,” said one of the four members who disagreed with January’s decision.
Another board member said a roll back was “out of the question” as markets were already moving on the assumption that negative rates would remain in place.
The BOJ unexpectedly cut a benchmark interest rate to minus 0.1 percent in January as it stepped up its faltering efforts to revive growth, pull Japan out of years of deflation and achieve a goal of 2 percent inflation.
But the radical policy prescription has failed arrest an unwelcome rise in the yen, drawing criticism from lawmakers for confusing, rather than calming, markets.
At the March meeting, advocates of negative rates said the policy was exerting its intended effects with mortgage loan rates already on the decline, the summary said.
Dissenters, however, argued the policy may have aggravated the public’s deflationary mindset by causing anxiety over the outlook for Japan’s economy.
Others said the policy gave markets the impression the BOJ had no other choice but to revert to a negative rate policy because its asset-buying programme was reaching its limits.
“All the demerits of the policy I raised as risks are materialising,” one board member said.
Concerns were expressed over the gloomy outlook, with one member warning that risks to the economy remained tilted to the downside, the summary noted.
Several members complained that wage growth remained slow and the BOJ’s own index stripping away the effect of fresh food and energy costs may slip below 1 percent.
The index, which the BOJ scrutinises in gauging the broad price trend, showed annual consumer inflation slowed to 1.1 percent in January from 1.3 percent in December as the yen’s rebound pushed down prices of imported goods.
In March, the BOJ kept monetary settings unchanged but downgraded its economic assessment, signalling its readiness to deploy additional stimulus if risks derail a fragile
recovery.
The BOJ is the central bank of Japan. The Bank is often called Nichigin for short. It has its headquarters in Chūō, Tokyo. Like most modern Japanese institutions, the BOJ was founded after the Meiji Restoration. Prior to the Restoration, Japan’s feudal fiefs all issued their own money, hansatsu, in an array of incompatible denominations, but the New Currency Act of Meiji 4 (1871) did away with these and established the yen as the new decimal currency, which had parity with the Mexican silver dollar. The former han (fiefs) became prefectures and their mints became private chartered banks which, however, initially retained the right to print money. For a time both the central government and these so-called ‘national’ banks issued money.