The negative interest rate environment is weakening Japan’s banks — a key transmission valve for stimulating economic growth — the country’s chief financial regulator has warned.
The oblique but unusually critical comments from Nobuchika Mori, a former cheerleader of the country’s Abenomics growth programme, come as central banks across the globe face a backlash, and in some cases unintended consequences, over the unorthodox monetary policy of negative rates.
In Europe and Japan, which joined the negative interest rate club in late January, so-called Nirp has also failed to weaken the currency, with both the euro and yen appreciating in value this year.
As a result, investors have been withdrawing from Japan in droves. Foreign investors have pulled more than Y5tn ($46bn) out of Japanese equities since the start of the year and, in a clear vote against Nirp and the future direction of Japan under Abenomics, global fund managers surveyed by Bank of America Merrill Lynch revealed they were underweight Japanese equities for the first time since Shinzo Abe became prime minister in December 2012.
Mr Mori, commissioner of Japan’s Financial Services Agency, told financial market participants: “Low interest rates have prevailed and the yield curve has become flat. In this environment, it will become more and more difficult for banks to achieve balances between risk, return and capital.”
His speech on Wednesday, at the annual meeting of the International Swaps and Derivatives Association in Tokyo, highlighted a series of threats to the banking sector and added to escalating criticism of the path taken by the Bank of Japan.
Senior officials have privately questioned the wisdom of the policy as a whole and are especially critical of BoJ governor Haruhiko Kuroda’s suggestion of pushing even deeper into negative territory.
As in Europe, banking and finance shares were pummelled in the immediate aftermath of the Nirp announcement. This drove a broader slump in the Topix benchmark index, which has dropped 14 per cent since the start of the year.
Mr Mori has in the past been a big public supporter of Mr Abe’s Abenomics economic revival programme and of the unconventional monetary policies of the BoJ.
But he surprised some ISDA members by taking the opportunity to voice concerns about the impact of these policies. Among the risks, he said that Japan, along with many other countries, was already feeling the effects of an ageing population, matured consumption and what he called “limited room for economic growth”.
Many financial officials fear it is impossible to increase growth artificially through monetary policies that are not sustainable over time.