With such a market structure, a positive IOER may have the effect of inducing those holders to sell government bonds to the BOJ. Second, a negative IOER may incur the risk of undermining the intermediary function of financial institutions by lowering profitability in the banking system.
Banks may be unable to pass the increased cost (caused by the negative interest rate) on their retail depositors by lowering the deposit interest rate (which, at around 0 percent, is already low). Alternatively, financial institutions may attempt to raise their lending rates in an effort to maintain profits; however, that may discourage credit demand and thus undermine lending activities.