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Side effects seen 6 months after BOJ adopted negative interest rate policy

Aug. 16 marked six months after the Bank of Japan (BOJ) introduced a negative interest rate policy, but the central bank has come under increasing criticism for side effects hitting various sectors of the economy.

    As a result of interest rates on loans to businesses and housing loans dropping to record low levels, real-estate investments have expanded, but the BOJ policy has had limited positive effects contrary to what the central bank expected, as it has failed to help boost capital spending and consumer spending. Meanwhile, the BOJ has come under mounting criticism as its negative interest rate policy has brought about side effects, for example, in the form of deteriorated profits among financial institutions.

    "There has been an increase in the number of cases in which we receive offers for low interest loans from banks and credit unions. But companies can't go ahead and make capital investments unless they can foresee more business ahead," said Toshiaki Funakubo, chairman of the Ota Ward Industrial Association.

    The BOJ's negative interest rate policy implemented on Feb. 16 was aimed at encouraging businesses to invest in plants and equipment and consumers to buy houses. In fact, interest rates on loans for businesses and housing loans have dropped to record low levels, but consumer spending and investments have failed to gather steam.

    The sentiment of businesses and households became aggravated as risks of a global economic downturn became evident stemming from the slowdown of the Chinese economy and Britain's decision to leave the European Union (EU) at a time when the yen kept appreciating and stock prices were sliding. Even though interest rates have been kept at such low levels, businesses remain unable to move ahead to make investments aggressively. Domestic banks' outstanding loans have continued to increase 2 percent each month on an year-on-year basis since the introduction of the negative interest rate policy -- the same rate of increase before the BOJ implemented negative interest rates.

    Conversely, the side effects of the negative interest rate policy have begun to stand out. The yield on newly issued benchmark 10-year Japanese government bonds dropped to 0.3 percent at one point. As a result of this, investors were faced with difficulties in managing assets partly because financial institutions stopped selling government bond-based investment trust funds one after another. The negative interest rate policy has been adversely affecting corporate performances as it has become difficult for companies to manage funds for retirement allowances and pensions.

    The interest rate on ordinary deposits at major commercial banks dropped to a record low of 0.001 percent. That means the interest earned on depositing 1 million yen for a year is a mere 10 yen. But the balance of deposits from individuals stood at a record 441 trillion yen at the end of June. While the sale of savings-based insurance products discontinued one after another even before the negative interest rate policy was introduced, falling stock prices left few investment options. Financial adviser Mitsugu Maekawa said, "As a result of the interest rates on government bonds turning negative, it has become difficult to make stable investments and the money that has nowhere to go has been taking refuge in savings."

    Households that are hard-pressed to protect their daily lives have lost the leeway to increase spending. The family income and expenditure survey for June shows that spending by households of at least two persons each dropped 2.2 percent from a year earlier. "Households are tightening their purse strings as a drop in their interest income and difficulties in managing pension and retirement funds are posing worries for the future," said a senior official of a mega bank.

    One exception to these trends is real-estate investment. Although domestic banks' overall lending has not gained steam, loans for real-estate investments hit a record 68.32 trillion yen at the end of June. Loans for real-estate investments accounted for a record 14.7 percent of the total outstanding lending. Investments in condominiums with advertised high yields are brisk, but it is not clear to what extent such investments would push up the economy.

    BOJ Gov. Haruhiko Kuroda said at a regular news conference in April that "It will not take half a year or a year" before the effects of the negative interest rate policy would emerge. While the policy has not produced positive effects as expected, Japan's economy is exposed to the gravity of the side effects.

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