The Bank of Japan says its negative interest rates have caused some disruption in fund flows and will hurt financial institutions' profits for the time being, acknowledging some of the drawbacks of the controversial policy. However, Japanese financial institutions have sufficient capital buffers to weather the pain and take on risk as ultra-loose monetary policy helps revive the economy, the central bank said in a semi-annual report on the country's banking system issued Friday.
"Financial market uncertainty since the start of this year ... has worked to curb financial institutions' risk-taking activity," the report said. "Once these factors dissipate, the effect of our policy will broaden." The BOJ stunned markets in January by adding a negative interest rate policy to its massive asset-buying programme, dubbed "quantitative and qualitative easing," in a fresh attempt to achieve its 2 percent inflation target.
Under the negative rate policy, the BOJ applies a 0.1 percent negative interest on some excess reserves financial institutions park with the central bank. The move failed to arrest an unwelcome yen rise or boost stock prices, instead drawing criticism from financial institutions for squeezing already thin margins and heightening volatility in the Japanese government bond (JGB) market. In the report, the BOJ acknowledged that "signs of a hold-up in the flow of funds have been observed," such as diminishing liquidity in the money market and the JGB market after the introduction of negative rates.