(Reuters) – The Bank of Japan drove a short-term interest rate below zero, a dramatic step in its already unprecedented effort to stoke inflation and a likely sign it will continue its aggressive asset purchases.
The BOJ bought three-month bills for more than their redemption value on Tuesday, traders said, essentially paying to lend money to the market.
The central bank’s first purchase at a yield less than zero underscores its determination to pay literally any price to help reflate the long-moribund economy.
BOJ officials wouldn’t confirm the negative-yield purchases, which were part of a market operation that bought 500 billion yen (US$4.7 billion) of short-term bills, on the grounds they cannot disclose individual transactions. But the bank was clearly untroubled by the idea of crossing this line.
“Basically, I don’t see any problem” with buying at below-zero rates, BOJ Deputy Governor Kikuo Iwata said on Wednesday during a visit to Kanazawa in central Japan. “I don’t think this will cause any disruptions in the BOJ’s market operations.”
Having paid such a high price, the BOJ will likely have to continue doing so as banks know it is determined to meet its target of asset purchases, potentially pushing negative yields out to longer-dated debt, market participants said.
The unconventional move, and the prospect of more to come, could revive criticism that the BOJ is “monetizing” the national debt – essentially giving politicians carte blanche to spend the money the BOJ is printing under its easing program.
Giving away money, as the BOJ will be doing if it holds the paper to maturity, could also be seen as subsidizing Japanese banks. Lenders that buy debt from the government stand to make an easy profit if the government pays above par for the paper.
But going below zero does not signal that the BOJ will soon need to formally change policy, said officials familiar with the central bank’s thinking.
Indeed, they said, negative yields are a consequence of the current massive asset purchases that are aimed at ending 15 years of deflation by doubling base money in the economy and pushing consumer-price inflation to 2 percent during the fiscal year from next April.
By contrast, the European Central Bank in recent months has explicitly targeted a negative rate for its overnight deposit rate below zero.
Although the BOJ pioneered “quantitative easing” – targeting the amount of liquidity injections rather than an interest rate – in the early 2000s, negative yields represent new territory for a central bank that already buys the equivalent of 70 percent of all new government debt issued.
BOJ officials acknowledged from the start of Governor Haruhiko Kuroda’s “quantitative and qualitative easing” (QQE) last year that at some stage they might have to take extreme steps to nudge financial institutions into selling their Japanese government bond holdings.