By Leika Kihara and Takahiko Wada

TOKYO, Reuters – The Bank of Japan’s scheme to help smaller lenders hit by ultra-low interest rates has adversely pushed up borrowing costs short term. This complicates the central bank’s plan to end easy monetary policies.

An era of low interest rates has resulted in losses for regional lenders over the years. These fears have led to fears of a banking crises. The BOJ introduced a 0.1% rate on deposits that are held by regional banks.

This prompted small banks to tap the money market aggressively to move funds into BOJ accounts. The benchmark rate climbed to close to 0%, in direct contravention of the central bank’s policies to keep short-term rates below 0.1%.

Eight months after its initial introduction, the BOJ took unprecedented action by deciding Tuesday that it would modify the rules for the reward program.

Although the BOJ has reacted to immediate concerns about rising rates, the BOJ’s policy framework has been complicated and is now an incongruous balancing act.

Naomi Muguruma (NYSE:), senior market economist, Mitsubishi UFJ, stated that the BOJ introduced a variety of schemes over recent years which contradicts its negative interest policy. This penalises banks who hold onto cash. Morgan Stanley (NYSE:) Securities.

“The core of BOJ’s Monetary Policy seems to be floundering as a consequence. “The central bank has to make a decision about what priority it is going to give.”

On Sept. 9, Japan’s Key Money Market Rate, the average overnight rate for Japan’s call rates, climbed up to reach -0.006%. This is its first positive day since 2016.

Last month it was close to 0.08%. As of October 31, the outstanding balance that regional banks had borrowed from uncollateralized call markets was over 11 trillion yen (roughly double January’s level).

GRAPHICS: Japan’s overnight call rate moves since YCC https://graphics.reuters.com/JAPAN-ECONOMY/BOJ/gdvzydbgrpw/chart.png

Although the impact is not immediate on the economy, a rise of more than 0% could cast doubts on BOJ’s ability to control rates and its credibility in the yield curve control policy (YCC).

According to a bank manager, “If overnight call rates turn positive, it will be a denial by the BOJ’s policy.” He spoke anonymously.

Some BOJ policymakers voice concern.

A September meeting of board members heard one representative say, “We must watch closely whether there is any disruption in market operation,” according to the minutes.

GRAPHIC: Japan’s banks in the regions have a large call money market balance

has risen https://graphics.reuters.com/JAPAN-ECONOMY/BOJ/byvrjkenkve/chart.png

On Tuesday, the BOJ moved to limit regional lender payouts using its relief program. This shows how delicately the central bank is trying to balance two goals: to caprate rates but not hurt bank profits.

The BOJ did take steps in March in order to sustain YCC, but the unintended increase in short-term rate has raised questions about the sustainability of the policy as central banks contemplate rate hikes.

Takahide Kuchi, an ex-board member of the BOJ said: “By providing subsidies to regional banks it is effectively phasing in its unpopular negative rates policy.”

It would make things much easier for the BOJ to stop imposing negative interest rates. However, it cannot as this could lead to an undesirable yen-rise.

As banks listen to the warnings of BOJ officials, they have managed to stabilize money market rates.

There is still uncertainty about how much calm there will be.

A regional bank fund manager explained that “no bank would dare to challenge the BOJ” and tap funds at positive interest rates. However, this is economically sensible. However, the possibility exists that the call rate could turn positive if it does.

($1 = 114.8800 yen)