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New BOJ framework aims to curb harmful effects of negative interest rates

The Bank of Japan (BOJ) has introduced a framework covering targets for long-term interest rates to curb the harmful effects of negative interest rates that it implemented in February this year.

After the BOJ lowered specified interest rates on money that financial institutions despot with the central bank to minus 0.1 percent under its negative interest rate policy, 10-year interest rates also plummeted below zero. As a result, life insurance companies and pension funds that invest in long-term (10-year) government bonds using money collected as premiums from policyholders faced difficulties in gaining yields. This forced insurers to suspend sales of some of their insurance policies.

Commercial banks also faced risks of their profits decreasing as a result of a sharp plunge in interest rates on the loans they extend to their customers.

These circumstances fueled concerns among depositors, particularly elderly people, about their future, which critics say caused a consumer spending slump.

To deal with these problems, the BOJ has introduced a framework in which the central bank can control not only short-term but also long-term interest rates. This allows the central bank to prevent long-term interest rates from plunging to alarming levels, thereby minimizing the harmful effects of negative interest rates.

BOJ officials hope that the framework will be effective in increasing yields that insurance companies and pension funds can gain from investing the money they collect as premiums, thereby decreasing a feeling of anxiety among consumers and helping expand consumption. The central bank believes that the measure will prevent commercial banks' profits from decreasing and encourage them to actively extend loans.

Long-term interest rates serve as criteria for fixing interest rates on housing loans and long-term loans for companies. The BOJ will take advantage of the new framework to prevent long-term interest rates from fluctuating sharply in an effort to encourage businesses to proactively invest in plants and equipment from a long-term perspective and to persuade individuals to buy houses and actively invest their money.

However, it is a commonly accepted theory that it is difficult for the central bank to control long-term interest rates, which can fluctuate due to various factors such as overseas economic conditions.

Many market players are skeptical of the effectiveness of the new framework, with one describing it as a "large-scale experiment."

The BOJ has promised to continue to increase the amount of money it supplies to the market until the annual inflation rate is stabilized at over 2 percent. When the central bank launched its ultra-easy money policy, it set the target of achieving a 2 percent annual inflation rate within two years.

By clarifying that the BOJ is prepared to maintain its ultra-easy money policy until the inflation rate stabilizes, even after it reaches the 2 percent level, the central bank intends to convince companies and individuals that prices will rise in the future, encouraging them to bring forward their plans to spend money, thereby vitalizing the economy.

"It was an extremely strong commitment, demonstrating the BOJ's determination," Kuroda told a news conference.

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