Kuroda says BOJ has room to cut rates further

Bank of Japan Governor Haruhiko Kuroda said there is room to cut interest rates further to support the economy, countering a growing suspicion that public criticism over January’s shift to negative rates will prevent him from persisting with the policy.

Kuroda made the comment in parliament on Wednesday, a day after the central bank’s monetary policy statement removed a line on its readiness to cut rates further that had appeared in January’s policy statement.

“Of course, there’s a possibility that we will decide to cut interest rates further,” Kuroda said. “Theoretically, there is room to do so,” he said in answer to a question from an opposition lawmaker on whether the BOJ could cut rates to around minus 0.5 percent.

His statements follow recent commentary from economists and market participants that the BOJ was now backpedalling on its dramatic shift to a negative interest rate policy in January after a market sell-off and protests from financial institutions.

Kuroda also said that negative rates work to weaken the country’s currency, but emphasized that the BOJ wasn’t targeting the exchange rate.

“Our monetary policy does not target exchange rates,” he said, stressing that currencies are affected by various factors, not just by interest rate differentials between two countries.

“All other factors being equal, however, (a negative rate policy) works to weaken a country’s currency,” he added.

The BOJ unexpectedly cut a benchmark interest rate to minus 0.1 percent in January as it stepped up its faltering efforts to revive growth and pull Japan out of years of deflation.

But the historic shift to a radical policy prescription – adopted by major central banks in Europe – has failed to boost stock prices or arrest an unwelcome rise in the yen, drawing criticism from lawmakers for confusing, rather than calming, markets.

Since then, the BOJ has been in damage control with Kuroda scrambling to find positives in the policy which is proving unpopular with both the public and banks.

European Central Bank head Mario Draghi also poured cold water on expectations he would take rates further into negative territory, adding to increasing calls among global policymakers that monetary policy may be nearing its limits.

The BOJ kept monetary settings unchanged on Tuesday and offered a bleaker view on the economy, signaling that it was ready to roll out further stimulus if needed to revive growth.

But in a nod to criticism over its negative rate policy, it removed a line from its prior statement in January that it is ready to cut rates further, triggering a bout of yen buying by investors betting Kuroda would hold off on cutting rates further.

It also widened exemptions to negative rates to include $90 billion in short-term funds dubbed money-reserve funds (MRFs), after the securities industry warned it could curb investment in the stock market.

Kuroda said he saw no room to offer exemptions besides MRFs, which are different from other funds because it acts as a key settlement tool by giving investors a place to park their cash while they prepare for stock purchases.

Source: Reuters

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