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18 Mar 2016
BOJ negative rate move may only influence shorter-term rates – Goldman Sachs
Research Team at Goldman Sachs, suggests that the BoJ’s negative rate policy is distinguished by the ‘variable’ tiered reserve system, in which the amount of banks’ current account balances at the BOJ remunerated by zero interest rate (so-called macro add-on balance) increases as QQE increases the current account balance.
Key Quotes
“Therefore, once a bank deposits cash at the BOJ, the rate of return is initially -0.1%, but will rise to zero as the macro add-on balance increases on a quarterly basis.
For instance, if a bank leaves cash at the BOJ for, say, two years, the bank would be charged the negative rate only for approximately three months, and then the IOER becomes zero.
This implies that under the BOJ’s tiered reserve system, interest rates for longer than a quarter are affected less by cutting the IOER.
We argue that this is not necessarily inconsistent with the sharp decline in long-term JGB rates following the rate cut in January. But we may need to consider the possibility that further cuts in the IOER would not lower long term rates in the way the rate cut in January 2016 did.
This problem is unique to the BOJ’s negative interest rate policy, with its variable tiered structure, and has not been seen in the Euro Area, Switzerland or Denmark, where the reserve amount exempted from negative rates is fixed.”
Key Quotes
“Therefore, once a bank deposits cash at the BOJ, the rate of return is initially -0.1%, but will rise to zero as the macro add-on balance increases on a quarterly basis.
For instance, if a bank leaves cash at the BOJ for, say, two years, the bank would be charged the negative rate only for approximately three months, and then the IOER becomes zero.
This implies that under the BOJ’s tiered reserve system, interest rates for longer than a quarter are affected less by cutting the IOER.
We argue that this is not necessarily inconsistent with the sharp decline in long-term JGB rates following the rate cut in January. But we may need to consider the possibility that further cuts in the IOER would not lower long term rates in the way the rate cut in January 2016 did.
This problem is unique to the BOJ’s negative interest rate policy, with its variable tiered structure, and has not been seen in the Euro Area, Switzerland or Denmark, where the reserve amount exempted from negative rates is fixed.”