An Overview of Bank of Japans Negative Interest

Rate Policy Experience

Dr. Sayuri Shirai
November 2016

Keio University and ADB Institute

Former Bank of Japan Board Member

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank
Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of
the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with
ADB official terms.
Extraordinary Monetary Easing (Asset/GDP)

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BOJs Monetary Easing Since 2013

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1st Stage: QQE and QQE Expansion (April 2013-Jan. 16)
Monetary
Monetary Easing Easing Stance:
Stance: Achieving 2% atAchieving 2% at
the earliest possible timethe
with earliest possible
a time horizonQQE timeaswith
will continue long asa
necessary to achieve 2% in a stable manner.
time horizon of about 2 years. QQE will continue as long as necessary to
achieve
Policy Target:the 2% the
Shift from target in a stable manner. Wont hesitate to add easing.
short interest

Policy
Policy Target:
Target: Shift fromChange from
the short interest the ST interest rate to the Monetary Base

QQE (April 2013): Quantity (monetary base and JGB) and Quality (risk assets)
Annual increase of the monetary base: 60-70 trillion yen ($550-650 billion)
Annual increase of (1) JGBs (50 trillion yen) with maturity up to maximum 40 years),
(2) ETFs (1 trillion yen), and (3) REITs (30 billion yen)
Mo

QQE Expansion (October 2014):

Annual increase of the monetary base and JGBs: 80 trillion yen each
Annual increase of ETFs (3 trillion yen) and REIT (90 billion yen)
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2nd Stage: A Negative Interest Rate Policy (Jan-Aug 2016)
Monetary Easing Stance: QQE with a negative interest rate will continue as
long as necessary to achieve the 2% target in a stable manner. Wont hesitate
to add monetary easing in 3 dimensions
Mo (quantity, quality, and interest rate).

3-Tier Reserve System: 3 interest rates on reserves (+0.1%, 0%, 0.1%)

Annual ETF purchase: Doubled to about 6 trillion yen in July 2016

Unique Market Reactions: Markets Reacted Positively (depreciation and stock price hike) in
the First 2 days, followed by the Strong Negative Reaction
BOJ Communication: Adoption after a repeated denial surprised markets
BOJ Operation: Inconsistency between a negative
Mo interest rate and the JGB purchase
Banks: Declined interest rate margins and flat yield curve reduced banks profits.
Institutional Investors: Lower returns and a larger PV of liability worsened financial base.
Markets: Declined liquidity/functioning in JGB market. Shrinkage of MMF industry.
Households: Concerned about a low deposit rate and increased cash holdings 5
3 Tier System of the Reserves
0.1% applied to
only 10-30 trillion
out of 300 trillion

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 3rd Stage: Yield Curve Control (Sept. 2016 Present)
Backgrounds: Criticism from the financial sector and Tensions in continuing JGB purchases

Mo
Policy Target: Shift from the Monetary Base Control to Yield Curve Control
Two pinpoint targets: negative interest rate (0.1%) and 10 year yield (0%)

Monetary Easing Stance: QQE with yield curve control will continue as long as
necessary to achieve the 2% target in a stable manner. Monetary easing will be
added by a cut in the two interest rates.

Inflation Overshooting Commitment: The monetary base will expand until

inflation exceeds 2% and stays above 2% in a stable manner.
BOJ projects to expand JGB purchase of current 80 trillion over one year
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 A Shift from Quantity to Interest Rate: My View
shoofPurpose: Maintaining
the interest rate hike long-term
and (2) to generate a steeper yield curve interest rates at low levels will be achieved by lowering
expectations on the path of future short-term interest rates (forward guidance)
Positive Aspects: (1) More sustainable JGB purchases, (2) less burden on BOJs balance sheet, (3) Positive impact on the pension funds and insurance firms

yieldsrather than reducing term premiums through the JGB purchases.

Negative Aspects: (a) Complexity, (b) Greater distortion to the JGB market by suppressing price information and reducing liquidity, (c) Greater Misallocation of credit, (d) difficulty to control 10 year

Conceptually, a negative interest rate and its forward guidance alone could stabilize
long-term interest rates at low levels. But could be mistaken as a temporary measure.
A 10-Year Yield Peg: helps to stabilize markets expectation on the path of future short-
term interest rates and, at the same time, to prevent an interest rate overshoot.
Reinvestment Policy: also helps to prevent an interest rate overshoot.

Positive
sitive Aspects: (1) More sustainable JGB purchases with no more quantity expansion,
Aspects: (1) More sustainable JGB purchases, (2) Less burden on BOJs balance sheet, (3) Positive impact on the pension funds and insurance firms
Negative Aspects: (a) Complexity, (b) Distortion to the Jsitive Aspects: (1) More sustainable JGB purchases, (2) Less burden on BOJs balance sheet, (3) Positive impact on the pension funds
(2) Positive impact on institutional investors, and (3) Smoother transition in the event of
and insurance firms
Negative Aspects: (a) Complexity, (b) Distortion to the JGB market by suppressing price information, (c) Distortion in credit allocations
normalization
GB marka et by suppressing price information, (c) Distortion in credit allocations

Negative Aspects: (a) Complexity, (b) Declined function in the JGB market by suppressing
price information and sudden reversal risk, (c) Distortion in credit allocations and
delayed corporate restructuring 9
Correction of Overvalued Yen and Undervalued Stock Prices

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 Real and Nominal GDP Potential GDP Growth (%)
(2013 Q1=100)

Avg. Q/Q % from 2013 4-6 to 2016 7-9:

Real 0.16% and Nominal 0.4%

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 BOJs Next Move
The change in CPI will likely to turn positive in early 2017 due to (1) base effect,
(2) government fiscal stimulus, and (3) yens depreciation.

The BOJ could examine whether (a) the 10-year yield at 0% and (b) the
difference in the two interest rates at 0.1% are appropriate given that the term
premium remain negative.

One possibility is to raise (a) and (b) somewhat, while clarify its intention to
reduce the amount of asset purchases

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