The central bank, which announced the shock decision on January 29, will charge banks 0.1 per cent for parking additional reserves with the BoJ to encourage banks to lend and prompt businesses and savers to spend and invest.
While the announcement briefly drove down the yen and buoyed Japanese share prices, markets quickly went into reverse.
“It’s getting clearer that Abenomics is a paper tiger,” said Seiya Nakajima, chief economist at Office Niwa, a consultancy, referring to Prime Minister Shinzo Abe’s policy mix of monetary easing, spending and reform.
“The impact of monetary easing is similar to currency intervention. The first time they do it, there’s a huge impact. But as they repeat it, the impact will wane,” said Nakajima.
Though senior BoJ officials expected only a minor impact on Japanese banks, their stock prices plunged, contributing to a global market selloff.
The problem was partly bad timing, as global markets were already in a tailspin over China’s slowdown, US rate hikes and tumbling oil prices. But the reaction leaves BoJ Governor Haruhiko Kuroda’s assertion that his policy is having its intended effects looking threadbare.
“It seems as though the BoJ’s action triggered the market moves,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management. “But a better explanation would be that concerns elsewhere overwhelmed the BoJ action.”
In the 11 days since the BoJ board’s announcement, the benchmark Nikkei index has fallen 8.5 per cent, despite a sharp rebound on Monday, while the yen has climbed 6.5 per cent against the dollar.
Japanese bank shares have slumped by as much as 30 per cent as they are unlikely to pass on negative rates to savers, who already get negligible interest on their deposits but would baulk at paying to save. Negative rates could push down bank operating profits by 8-15 percent, Standard and Poor’s said.
Economists at Mitsubishi UFJ Morgan Stanley Securities said any economic benefit from negative rates might be smaller in Japan than they would be in Europe.
“Japanese banks rely for 80 per cent of funding on deposits, unlike European banks, which raise more funds from markets, suggesting their margin is likely to be pressured more,” they said.
Japanese households have about half their 1,600 trillion yen assets in deposits while their debt is much smaller, so have little to gain from negative rates, they added.
Their analysis shows companies will gain 0.2 trillion yen from lower borrowing costs, or just 0.3 per cent of corporate operating profits.
The biggest beneficiary is government, by far the biggest borrower in the country, which would save 1.2 trillion yen.
A poll by Asahi Shimbun daily showed 61 per cent of people don’t expect negative rates will help the economy while only 13 per cent said they will.
The 10-year Japanese government bond yield initially fell below zero on the easing – a first among Group of Seven economies – but has recovered to 0.090 per cent above zero.
Prices on 10-year JGB futures imply volatility above 5 per cent, a 2.5-year high and more than triple the level at the start of the year. This high volatility could persist, and the BOJ has only itself to blame, some market players say.
The overnight call rate, the benchmark for interbank lending, fell to 0 to 0.001 per cent on Tuesday, down from its weighted average of 0.074 per cent on Monday.
Although the rate is likely to fall to negative levels eventually, it is unlikely to fall below zero for now, partly because many banks have not yet fixed their trading system to cope with negative interest rates.
“At the moment, no one seems willing to lend at negative rates… The BoJ decided to introduce negative rates so suddenly without giving banks time to prepare for them,” said Keita Higano, market economist at Totan Research.
The BoJ also revealed on Tuesday the detailed estimates on how its three-tier rate system will work.
Of 253.4 trillion yen deposits parked at the BoJ, negative rates will be applied to about 23.2 trillion yen, more than some market players expected. Another 23.8 trillion yen will have zero interest rates while the rest will continue to receive positive 0.1 per cent interest.
While Mr Kuroda notes the BoJ can cut rates deeper below zero, market participants say there’s little hope that more of the same would have a beneficial effect.