Three months have passed since the Bank of Japan (BOJ) adopted its negative interest rate policy. This was implemented as an ultimate experimental breakthrough measure after the BOJ instituted quantitative monetary easing on an unprecedented scale for some three years without generating the results that it had anticipated.
While BOJ Gov. Haruhiko Kuroda touted the negative interest rate policy as "the most powerful monetary policy framework in the history of modern central banking," its impact on commodity prices and hoped-for stabilizing effects on financial markets remain unclear. From the commodity price and economic growth outlook released by the BOJ late last month for fiscal 2016 and fiscal 2017, it's obvious that even the BOJ has grown more pessimistic compared to this January.
Interest-rate levels have no doubt dropped across the board -- including among government bonds and mortgages -- by a notch. One would expect that such a phenomenon would make corporations feel that it would be advantageous to make capital investments and for individuals to buy homes. What has occurred instead is that while there has been a surge in mortgage refinancing, the effects of the negative interest rate policy on investments and consumption have been vague. Rather, it appears that people are taking defensive action, keeping their cash to themselves.
Meanwhile, concerns that the negative interest rate policy may be doing more harm than good are becoming increasingly widespread.
Private banks, which have seen the difference in lending interest rates and deposit interest rates shrink as a result of the central bank's policy, are expected, in the current fiscal year, to post significantly lower profits than they did previously. Because the rate of return on government bonds and other financial products have fallen, these banks have come under pressure to increase reserve funds for future pensions and severance payments, which are causing their earnings to drop.
The possibility that banks, under such management difficulties, could increase high-risk investments in an attempt to secure as high a return rate as possible is worrisome. That could involve using reserve funds for pensions and severance payments to purchase corporate bonds and overseas assets with low creditworthiness. If the public's uncertainty toward the future prompts them to save instead of consume, the negative interest rate policy could have the opposite effect of what it aims to achieve, furthering deflation. This is exactly what is happening right now in Denmark, which adopted a negative interest rate policy ahead of Japan.
Perhaps the biggest damage the policy could cause is plunging trust toward the BOJ. Gov. Kuroda has emphasized that there is still room for additional monetary easing through an expansion of negative interest rates, but frequent implementation of such measures serves as evidence that what Kuroda has characterized as "the most powerful monetary policy framework" is, in fact, not so powerful or effective.
Conversely, if the BOJ keeps pushing back its estimated time frame for when its target of 2-percent inflation will be achieved while also postponing additional monetary easing measures, Kuroda's self-proclaimed modus operandi of taking additional easing measures "without hesitation" will lose all gravity.
The longer the negative interest rate policy is instituted, the more glaring the policy's shortcomings become, lowering confidence among the public and market players. This is a massive detriment to the central bank. Instead of stubbornly insisting that its negative interest rate policy will have steady spillover effects, the BOJ should confront the challenges it faces head-on with some humility.