NEW YORK (Reuters) - The Bank of Japan designed its new negative interest rates to avoid hurting bank profits, and the recent drop in bank stocks is "overdone," the BOJ's deputy governor said on Friday in what amounted to a defense of last month's shock policy decision.
Hiroshi Nakaso, seeking to explain the move to bankers and investors in New York, said that while a key rate could technically be lowered deeper into negative territory, "my sense is that for now I would like to watch carefully how this new policy is going to work through the economy."
The BOJ unexpectedly cut a benchmark interest rate below zero on January 29, a bold move that stunned investors and that was meant to stimulate the economy and overcome deflation amid volatile markets.
While the move initially depressed Japan's currency as desired, the yen has since rebounded sharply while global stock markets have tumbled with banks hit hardest. The MSCI International World Banks index dMIWO0CB00P is down 13 percent since the close of markets on the day of the BOJ's decision.
But the three-tiered system, which limits negative rates only to marginal excess bank reserves, "is carefully designed to mitigate aggressive impact on banks' profitability while ensuring the effect of negative rates on prices in financial markets," said Nakaso, who walked a stage and pointed to charts to make his point at a conference here.
"We have seen a substantial drop in bank shares in the ... past couple of days, but I think this is a bit overdone in this regard."
The negative rates policy, though also having been adopted in Europe, has been criticized for amplifying volatility that has gripped markets all year. Nakaso said he and colleagues were talking with bankers in Japan "to seek their understanding that overcoming deflation is in everyone's interest."
Asking rhetorically how far the BOJ might go with negative rates, he said: "I don't have the answer yet."
He noted that the BOJ can always charge negative interest on bank notes "if there is a leakage from reserves to cash," which would undermine the policy, he said.
"It is therefore technically possible to go farther down in the negative," Nakaso said. "But my sense is that for now I would like to watch carefully how this new policy is going to work through the economy."
(This version of the story corrects bank stocks' fall to 13 percent in fourth paragraph)
Reporting by Jonathan Spicer, additional reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama