No rate cut for Japan's embattled banking industry

The central bank is already constrained by its negative interest rate policy.

The Bank of Japan (BoJ) kept its policy rate unchanged at -0.1% despite the expected negative economic impact of the coronavirus outbreak, suggesting that it has no further room to cut, according to Fitch Solutions.

Large and regional banks have long been burdened by the negative interest rate policy (NIRP), says Fitch. The central bank is also constrained by the policy, with its balance sheet ballooning to an all-time high of $5.46t (Y584.92t) in February.

Meanwhile, the benchmark 10-year Japanese government bonds (JGBs) continue a downward decline and have remained at their lowest levels after April 2016, when the NIRP was first introduced.

Instead, BoJ introduced three measures to “enhance monetary easing”: increasing its purchase of riskier assets such as exchange traded funds (ETFs) and Japan real-estate investment trusts (J-REITs) to $110b (Y12t) and $1.67b (Y180b) a year, respectively; providing loans against corporate debt with a 0% interest rate; and providing liquidity to domestic banks by partnering with other major central banks such as the US Federal Reserve, the European Bank, and the Bank of England, amongst others.

BoJ is likely to maintain its policy rate at -0.1% in 2020, but may introduce a more drastic rate cut should the 2020 Summer Olympics be postponed or cancelled as this would add another layer of downside pressure to economic growth. In this scenario, the BoJ may ramp up its purchases further, noted Fitch.

Its large balance sheet could become another constraint for further quantitative easing. The balance sheet is now larger than Japan’s whole gross domestic product (GDP), at around 105%.