Bank of Japan chief Haruhiko Kuroda spoke last week at a conference in Japan, ahead of an assessment of how effective Japan’s extraordinary monetary policy has been. Nestled in the remarks, we found a few items of interest. Kuroda said:
We should take account of the possibility that such developments can affect people’s confidence by causing concerns over the sustainability of the financial function in a broad sense, thereby negatively affecting economic activity.
By “these developments” he is referring to the impossible position that many financial institutions find themselves in -- particularly companies that sell insurance or annuities -- who are finding that negative interest rates are simply destroying their business models. In other words, he is acknowledging that negative rates are eating away at the foundations of the financial system.
Kuroda continued:
What we should bear in mind when conducting monetary policy is not its ‘limit’ but a comparison between its ‘benefits’ and ‘costs,’ as is the case with any public policy. There is no free lunch for any policy. Given that we have been implementing such large-scale monetary easing, any additional monetary easing entails ‘costs,’ which negatively affects some sectors. That said, we should not hesitate to go ahead with it as long as it is necessary for Japan's economy as a whole; namely, if its ‘benefits’ outweigh its ‘costs.’ Furthermore, what is important is that a balance between ‘benefits’ and ‘costs’ can change depending on the situation.
The “benefits” of extraordinary monetary policy are stimulation of the economy… and some of the “costs” are becoming more evident -- the extreme pressure on parts of the financial sector. It also sounds to us like he is delicately introducing language which suggests that the Bank of Japan is willing to evaluate when those costs become too high… and the benefits are not great enough to justify them.
Investment implications: After speaking well about negative rates at the annual Jackson Hole summit, Bank of Japan governor Haruhiko Kuroda went home and made remarks suggesting that negative rates are beginning to create trouble in the financial system… and might be adversely affecting psychology by casting doubt on the sustainability of the financial path the Bank has taken. Such negative psychology could outweigh any positive effects of negative rates. The Bank of Japan has been ground zero for the extremes of post-crisis monetary policy; we’re watching closely how it plays out.