Negative Interest Rate Policy and the Spring Wage Round

Two years since the introduction of the Negative Interest Rate Policy

Two years has passed since the negative interest rate policy (NIRP) was introduced by the Bank of Japan in January 2016. Current account balance at the Bank of Japan was disaggregated into three tiers, (a) basic balance, (b) macro add-on balance, and (c) policy-rate balance, and a negative interest rate of minus 0.1 percent was applied to the (c) policy-rate balance.

The purpose of the negative interest rate policy was to provide an incentive to the financial institutions to lend and invest so that economic activities would be stimulated. Financial institutions who want to avoid negative interest rate to be applied are expected to lend and/or invest so that the balance would be shifted to other financial institutions’ balance. Note that the total amount of policy-rate balance will not disappear unless macro add-on balance (b) is modified because it should reflect the monetary base that is expanding under the Quantitative and Qualitative Monetary Easing policy.

Holders of the policy-rate balance

Figure 1 shows the breakdown of the current account balance at the Bank of Japan by the categories of financial institutions.

It shows that “city banks” has the largest balance, followed by “other institutions subject to reserve requirements”. However, the distribution of the policy-rate balance seems to be quite different from the distribution of the overall current account balance.

To see which of the financial institutions held the policy-rate balance the most, Figure 2 shows only the distribution of the policy-rate balance across different categories of financial institutions.

Against the general impression, it is not the “city banks” that has the policy-rate balance the most (in fact they hold zero policy-rate balance), but it is the “other institutions subject to reserve requirements”. The latter category consists of Japan Post Bank, Shinkin banks, and Norinchukin Bank.

Among the three, Japan Post Bank has the largest amount of deposits among the institutions. At the end of December 2017, Japan Post Bank had 181.1 trillion yen worth of deposits, while the Shinkin banks had 142.2 trillion yen, and Norinchukin Bank 102.3 trillion yen.

But the amount of deposits only implies that required reserve needs to be correspondingly large. It does not necessarily mean that Japan Post Bank’s policy-rate balance is large.

However, there is a reason to believe that Japan Post Bank has a significant amount of policy-rate. That is because the Bank is still on its way to full privatization: it is still being restricted in terms of lending to firms and individuals. As a result, there is a limit as how much it can shift the policy-rate balance to other financial institutions. It seems probable that a significant amount of the balance has ended up at the Japan Post Bank.

Fall in profitability of the Japan Post Bank and zero base-up

Negative interest rate applied to the policy-rate balance held by the Japan Post Bank has provided a downward pressure on the profits of the Bank. In addition, negative interest rate policy has reduced the interest received on the large amount of Japanese government bonds held by the Bank (82 trillion yen as of end-March 2016). As Figure 3 shows, they have contributed to the decline of net profit of the Japan Post since the fiscal year ended in March 31, 2016.

One of the outcomes of the impact of the negative interest rate policy on the profitability of the Japan Post Bank is the denial of an increase in base wage (or “base-up”) of Japan Post Group employees. Together with the negative impacts of the negative interest rate policy on the profitability of the Japan Post Insurance, which also has a significant stock of Japanese government bond, it led the Japan Post Holdings, the shareholding company of the two, to deny the demand by the Japan Postal Group Union for a base up. After raising the base wage by 1000 yen in both 2014 and 2015 spring wage round, the base wage has been kept flat in 2016 and 2017.

Dampening the transmission mechanism of negative interest rate policy

The outcome of the spring wage round of the Japan Post Group is important for the overall outcome of the round. That is because most closely watched data released by the Rengo (Japan Trade Union Confederation), which is one of the most popular sources for information on the outcome of the spring wage round, is the average of the wage increase weighted by the number of trade union members. Japan Postal Group Union happens to be the largest single trade union in the Rengo: its membership of about 240 thousand commands about 8-9 percent of the total 2769 thousand members that participated in the spring wage round (or, more precisely, 2769 thousand members that were used in calculating the weighted average).

The partial privatization of the Japan Post Bank and Japan Post Insurance has resulted in dampening the transmission of negative interest rate policy onto wages. Unless there is a significant progress in the privatization process, the contribution that negative interest rate policy can make in achieving the 2 percent inflation target can be rather limited.