The views expressed in this presentation are the views of the author and do not necessarily reflect the

views or policies of the Asian Development

Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee
the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not
necessarily be consistent with ADB official terms.

Discussion
Negative Interest Rate Policies:
Sources and Implications
Asian Development Bank Institute 19th Annual Conference 2016
Implications of Ultra-Low and Negative Interest Rates for Asia
1-2 December 2016

Koji Nakamura
Bank of Japan
E-mail: kouji.nakamura@boj.or.jp
The views expressed here are those of the author and should not be interpreted as
reflecting the views of the Bank of Japan.
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 What the paper is
This paper provides comprehensive
assessments of negative interest rate policies
(NIRP) based on various episodes of advanced
economies.
The paper mainly relies on narratives rather
than a coherent model.
The paper will be a useful reference for
understanding pros and cons of NIRP.

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 What the paper says
The paper reports four main results.
1. Monetary transmission channels are analogous
to those under conventional monetary policy.
2. The key financial variables have evolved broadly
as implied by the standard transmission channels.
3. NIRP could pose risks to financial stability.
4. Spillover for EMEs are similar to those of other
unconventional policy measures.
Nothing special for NIRP!
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 First result: Transmission mechanism
Transmission channels under NIRP are mostly
standard.
Nominal interest rates

FX
Real interest rates
Stock prices
etc.
Real Economy

Inflation rates
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 Limitations and unintended
consequences
The paper emphasizes negative impacts of
NIRP on the financial sector.
BUT, how special is NIRP, compared with
conventional/ unconventional MPs?
Interest margins of the Japanese banks have
declined for a long time.

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 Net interest margins

Financial System Report, Bank of Japan, October 2016.

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 Effective lower bound?
1. Flight to cash?
If interest rates decline further in negative
territory, people may hold more cash. It depends
on holding costs of cash, insurance premiums of
stolen cash, etc.
2. Further negative impacts on the financial sector?
Currently the Japanese financial institutions have
sufficient capital and high levels of profits.
However, there may be a situation where NIRP
could cause more damages than benefits.

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 Second result: Financial variables
Financial variables have moved as those under
conventional MPs: Bond prices , Stock prices , FX.
In Japan, stock prices declined and the yen appreciated
after NIRP was introduced in January. This is due to
risk-off sentiment in global financial markets. The
counterfactual argument is that we would have much
worse results unless NIRP had not been introduced.
NIRP broke zero lower bound of nominal interest
rates. This provided further downward pressures on
longer-term interest rates.

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Long-term interest rates

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 Third result: Financial stability
As mentioned in the previous section, NIRP
has had negative impacts on the financial
sector.
However, the financial institutions have
sufficient capital and profit.
There is no evidence that financial
institutions functioning as intermediaries has
been impaired.

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Lending attitude of FIs

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 Sentiment channel?
Another issue is that an excessive decline in
interest rates --especially at the long and super-
long end -- lowers the rates of return on
insurance and pension products, and increases
firms' pension benefit obligations. The direct
impact of this on economic activity as a whole is
unlikely to be substantial. However, attention
needs to be paid to the possibility that it can
cause uncertainty regarding the sustainability of
financial functioning in a broader sense, with a
negative impact on economic activity through a
deterioration in people's sentiment.
Source: Comprehensive Assessment, Bank of Japan, September 2016.
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 Forth result: Spillover
Spillover impacts of NIRP are similar to those of
conventional/unconventional MPs.
Merits:
Higher growth of AEs leads to higher growth of EMEs
through trade channel.

Demerits:
Capital outflows, FX fluctuations, higher interest rates
may give negative impacts on EMEs.
The impacts may depend on exchange rate regimes,
capital controls, and economic fundamentals of EMEs.

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 Conclusion
Negative shocks

Benefits
NIRP Risks

Or other unconventional MPs, fiscal policy,

macroprudential/financial policy, structural policy.

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