The Bank of Japan is currently in the process of searching for ways to reduce costs associated with negative interest rates, sources with knowledge of the bank told reporters. The bank is considering to adopt the policy of negative interest rates as a deterrent to the dampening economy.
While reducing the interest rates to negative may help boost the economy, the bank is also likely to apply policies to prevent long and super long yields from dropping as it hurts financial institutions by cutting their profit margins.
As a matter of fact, the global economy is having its impacts on the health of the Japanese economy and it is discussing the possibility to apply its reform policies as early as next week.
Before the meeting of the Bank of Japan on September 18 and 19, the European Central Bank and US Federal Reserve policy announcements would take place on 12 and 19 of the month respectively. A stronger quantitative easing policy from the US and Europe may lead to more liquidity with customers that may raise the yen against other currencies, something that the Japanese economy not welcome with open hands.
The sources said that the most concerning impact of the negative interest rates in the economy is the declining yields which would cut into the profits of financial institutions. However, preventing such a side effect of deepening interest rates is difficult.
The Bank of Japan has been employing negative interest rates and other monetary easing policies to stimulate the economy. Consequently, it is not left will lesser options to eradicate the problem for the long term. The sources said that the yield curve flattening would be highly undesirable and that it would not be in line with the principle of yield curve control.