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NIRP has different effects in Japan and Europe – Nomura

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 15, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Research Team at Nomura, thinks that the Bank of Japan (BOJ) can learn the following two lessons from the measures announced by the European Central Bank (ECB) on 10 March.

    Key Quotes

    “(1) the markets' response to the measures confirmed that it is important for central banks not to make it look as if all policy options have been exhausted; and (2) ECB President Mario Draghi appears to have given the impression once again that a negative interest rate policy (NIRP) could have a negative impact on financial institutions' earnings. The new policy of lending to banks at negative interest rates, which the ECB has introduced as part of its new TLTRO framework (TLTRO II), might also be considered by the BOJ as a monetary easing option.

    Eurozone to see greater boost to lending from negative interest rates than Japan: One important way in which negative interest rates provide a boost to the economy is through growth in lending, but in this regard we think that the eurozone has greater prospects than Japan. This is because (1) eurozone banks had more cautious lending stances than their Japanese counterparts when negative interest rate policy was introduced in the region; and (2) Japan had lower absolute lending and deposit rate levels to begin with compared with the eurozone.

    Eurozone banks' loan-deposit ratios and wholesale funding ratios relatively high: As of end-2015, the loan-deposit ratio for Eurozone banks was 110.9%, much higher than the equivalent figure of 71.2% for Japanese banks. This difference is explained by the relatively high exposure of Eurozone financial institutions in their funding to wholesale funding in the form of bond issuance and interbank borrowing. As such, we do not think it correct to say that the high loan-deposit ratios at Eurozone banks mean Eurozone financial institutions face a relatively large negative impact from the introduction of negative interest rates.

    Much higher level of excess reserves at Japanese banks: The balance of excess reserves held at the ECB was €697.0bn (¥89trn) as of 4 March, equivalent to 6.6% of GDP, while excess reserves held at the BOJ of ¥235trn equate to a much higher 51.8% of GDP. We think this is the main reason the BOJ introduced a tiered structure for rates on current accounts aimed at easing the negative impact on earnings at financial institutions from the introduction of negative interest rates. We need to be aware of the difference in scale of excess reserves when comparing policies for interest rates on excess reserves in the eurozone and Japan.”
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