Reply To: Negative Interest Rates


(1) The BoJ is only charging the fee of 0.1 percent on additional excess reserves. So the excess reserves balances that commercial banks had before the announcement a few weeks ago are not subject to the fee. Of course, commercial banks could choose not to increase their excess reserves, that is what the BoJ is trying to bring about with its new policy.

What concerns central banks is that allowing commercial banks to build up and run down excess reserves reduces the control a central bank has over the money supply. When banks are fully loaned up, holding no or minimal excess reserves, then open market operations by central banks have a more predictable impact on the money supply through the so-called money multiplier. But, if commercial banks sell securities to their central bank and hold the funds as excess reserves or part of the funds as excess reserves, then the effect of the central bank’s purchase of securities from commercial banks is less predictable, i.e., less under the control of the central bank.

By charging commercial banks for additional funds that they hold as excess reserves, the BoJ is trying to put an upper limit on the building up of excess reserves by commercial banks. The BoJ hopes that from now on when it buys securities from commercial banks, they will respond by extending loans on top of the additional reserves. In other words, the BoJ is hoping that commercial banks treat the funds received from selling securities to the BoJ as required reserves instead of excess reserves.

(2) U.S. commercial banks are not the only participants in the Federal Funds market. The residual activity in the Fed Funds market is likely being conducted by foreign banks, government-sponsored enterprises, or other eligible entities.