Heard Of NIRP? The Controversial Economic Policy Is Backfiring

A negative interest rate policy (NIRP) is a rather unconventional monetary policy tool that allows nominal target interest rates to be set with a negative value, lower than the theoretical floor of zero percent. The mechanism is aimed at stimulating economic growth and sustaining inflation levels.

According to the Bank of Japan's Principal Figures of Financial Institutions, the average domestic lending balance rose 2 percent in March; this represents a slowdown from February’s 2.2 percent and January’s 2.3 percent. Over March, deposits also rose 3 percent.

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Since the NIRP was announced on January 29 and implemented on February 16, business sentiment deteriorated. Deutsche Bank analysts Yoshinobu Yamada and Takayasu Kudo "are doubtful whether CFOs of companies would increase their leverage even if interest rates were to fall somewhat."

The experts also looked into the impact of the NIRP on banks, which are unlikely to see corporate credit improve any further. "A cut in interest rates would only increase their risk, giving them little incentive to actively boost their lending," the analysts said, attributing the expansion of the loan-deposit gap to a rising deflationary mindset caused by NIRP.

"The loan-deposit gap has been filled to date by JGBs and BoJ current accounts, and we expect that trend to continue for some time," Yamada and Kudo continued.

It's true that banks can still earn positive yields by increasing their foreign bond investment. However, this implies price swing risks. In fact, "Few banks are likely to pursue equity investment aggressively given the eventual 250% risk weight would be applied."

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.