After more than half a decade of disastrous monetary policy which not only failed to stimulate inflation, boost exports or crush the yen, but has brought Japan’s banks to near collapse, in August we reported that the Bank of Japan came up with an “ingenious” new plan to flood the system with liquidity: it is paying banks hundreds of millions of dollars in bonuses to boost lending, a move analysts say was aimed at easing the side-effects of its negative interest rate policy.
And while record bank lending in the summer months suggested the BOJ’s plan is working – a very rare success of late in its losing battle to revive the economy – it was also a sign that policymakers’ focus is now more on supporting banks, rather than keeping rates low, according to Reuters.
To be sure, the literal wall of money printed by the BOJ in recent years has kept a lid on bankruptcies and job losses as the economy tips into a deep recession, although it has also meant that banks can not survive without continued life support from the central bank. And the prolonged battle with COVID-19 has only added strains on regional banks.
Needless to say, the local bankers were delighted with this latest indirect transfer from taxpayers to the top 1%: “This is one of the most effective policy moves the BOJ has made in recent years,” said Takehiro Noguchi, senior economist at Mizuho Research who personally stands to benefit from this “effective policy move.” We found his second comment far more illuminating:
“The BOJ will likely continue to take steps to alleviate the side-effect of its monetary easing… The BOJ thinks negative interest rates is something it should not have done.”
Fast forward 3 months when the validity of that statement was confirmed overnight when the Bank of Japan unveiled on Tuesday yet another scheme allowing banks to circumvent te catastrophic NIRP policy, one aimed at incentivizing regional bank to consolidate and help revitalize regional economies, the latest move which hints at growing concern over the health of the country’s banking system.
In the latest reversal of the country’s NIRP policy, Kuroda established over 7 years ago, the central bank said it will introduce a special deposit facility under which it will pay – not collect – 0.1% interest on current account balances held by regional lenders that meet certain criteria. Of course, in Japan interest rates are mostly flat or negative, and is one of the main reasons why Japan’s banking system, like that of the EU, has been on the verge of collapse for nearly a decade.
“The business environment surrounding regional financial institutions is becoming more severe due to the impact from the coronavirus pandemic, structural factors like dwindling population and continued low interest rates,” the BOJ admitted.
As a result, “the BOJ decided to create a system that assists financial institutions in making efforts to underpin their regional economies.”
And that system effectively reverses the central bank’s negative rate policy.
Under the three-year scheme lasting until March 2023, regional lenders that opt for mergers or business integration will be remunerated, the BOJ said in a statement. Regional banks that also improve their financial health – which ironically was sapped by the BOJ’s previous idiotic policies – such as by cutting operating costs, i.e., firing workers, will also be applicable for the scheme, the central bank said.
The move reflects a growing concern, shared even by some BOJ policymakers, over the rising cost and diminishing returns of its ultra-loose monetary policy.
Under a policy dubbed yield curve control (YCC), the BOJ guides short-term rates at -0.1% and long-term yields at zero as part of efforts to revitalize the economy. The policy, however, has added to strains for regional banks as it makes net interest income virtually impossible.
Japan’s new Prime Minister Yoshihide Suga has loosely pulled an Amadeus, and said there were “too many regional banks” in Japan, signalling his desire for some weak lenders to consider mergers or consolidation. Even before the BOJ’s latest move, some regional banks had already started the groundwork for consolidation.
Bottom line: the central banks is now aggressively encouraging banks to become too big to fail, and to reward them it will allow them to skirt the provisions of Japan’s negative rate policy which, we remind readers, was launched precisely to help banks and boost Japan’s economy. Instead both find themselves on the edge of collapse.