Meaning Of Japan’s Negative Interest Rate: Monetary Snake Oil Isn’t Working Anymore

Meaning Of Japan’s Negative Interest Rate: Monetary Snake Oil Isn’t Working Anymore

The world is back to a situation where there are no clear answers to economic issues. Another global recession is probably lurking around the corner

Would you keep money with a bank that charges you for keeping your money with it instead of giving you interest? Obviously you would be better off keeping your cash under your pillow, or digging a hole in your garden, if you have one. Even better, you should be thinking about spending it since your money is going to lose value by saving it with a bank.

Yesterday (29 January), the Bank of Japan (BoJ) expressed the hope that savers, especially corporate savers, would just do that – take their money out of bank current accounts and spend or invest it. It announced that it would charge a fee of 0.1 percent for certain categories of current accounts. Charging a fee for some accounts means you will be paying the central bank for keeping your money with it.

This makes Japan the second major central bank to think that the way out of a negative spending mindset would be to ask people to pay it money for holding savings or unspent balances. “Through the minus interest rate combined with quantitative easing, I hope we can support companies and individuals in breaking their deflationary mindset,” BoJ Governor Haruhiko Kuroda said.

Governor of the Bank of Japan, Haruhiko Kuroda (TOSHIFUMI KITAMURA/AFP/Getty Images)

A year-and-a-half ago, the European Central Bank (ECB) announced that it will charge banks 0.3 percent for parking their overnight funds with it – thus pushing them to explore better bets in lending money. Now Japan is doing the same, after years of following a near-zero interest rate policy. Apart from Japan and the ECB, even the US ran a near-zero money rate since 2008. The US Fed only last month raised rates, but one wonders if it was lighting a candle when the winds of recession are blowing elsewhere.

So what are the implications of two major economic powers deciding that negative rates are the only way to get growth up?

First, it means that monetary policy is not working. There is something more fundamentally wrong with their economies, and trying to make money cheaper may not get growth rates up.

Second, in a world where central banks are trying to force banks to lend and people to save less, it is doubtful if the US Fed can go in the opposite direction. If Japan will give you money for nearly free, who will borrow in dollars in the US?


Third, we are probably close to another global recession. Japan, Europe and China are all slowing down, and US may be getting there. Clearly, the slack in the world cannot be fixed just by easy money.

Fourth, India will get no help from a reviving global economy, but cheap money can now flow into Indian stocks and debt, as Indian assets are looking cheaper. But this depends on how risk-averse global investors are. India’s growth will thus depend on what we do here, not what happens abroad. Ironically, even as our central bank frets about the possibility of fiscal deficits and inflation, Japanese and ECB moneymen are praying for higher inflation. In this scenario, keeping our rates high in relative rates may not be necessary.

Fifth, clearly, the world’s major economies should shift the focus of revival efforts to the fiscal side, and also to enacting more fundamental reforms.

The world is back to a situation where there are no clear answers to economic issues. Neither the snakeoil of Keynesianism nor the frankincense of monetarism is working. New solutions are needed.

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What you need to know about the Bank of Japan and negative interest rates

Published: Jan 30, 2016 7:22 a.m. ET

Kuroda’s move was unexpected

AFP/Getty Images

Bank of Japan Gov. Haruhiko Kuroda

By

WilliamWatts

Deputy markets editor

The Bank of Japan brought the thunder Friday, shocking investors and economists after it pushed a key interest rate into negative territory in its latest attempt to reinflate the country’s economy.

Here’s what you need to know about negative rates and the Bank of Japan:

The rate cut

The Bank of Japan announced it had cut the rate on excess reserves to minus 0.1%, meaning institutions will have to pay the central bank for the privilege of parking reserves that exceed those required by regulators. The rate on most existing reserves, however, remains at 0.1%, while the rate for required reserves was cut to zero (see chart below). Unlike the single negative rate applied to deposits parked at the European Central Bank, the Japanese move is similar to tiered measures put in place by the Swiss National Bank, which punishes sight deposits, or commercial bank assets, of more than 320 billion Swiss francs ($312.5 billion) with a fee of 0.75%.

Bank of Japan

Why would it do that?

The move does speak to a certain degree of desperation.
There appear to be a number of reasons for the move. The most pressing is the fact that the Bank of Japan continues to struggle to achieve its goal of pushing inflation back up to 2%—considered a healthy level for most economies. The central bank on Friday further pushed out its timetable for achieving that goal to the first half of 2017.

Read: How to brace for the next central banks surprise.

Part and parcel of those concerns is the recent strength of the Japanese yen USDJPY, +1.95% While the currency has weakened sharply since late 2012 when the dollar fetched less than ¥80, it had found some renewed strength recently. Some analysts saw the ¥116 level as a possible line in the sand that might have spooked some policy makers and contributed to Friday’s decision.

See: Perma-bear Marc Faber denounces BOJ move.

Weak economic data and concerns that the bank’s ability to expand its already sizable asset-buying program amid liquidity concerns are also seen contributing to the move.
In the wake of the BoJ’s decision Friday, the yen plummeted to its lowest level in five weeks against the dollar to ¥121.00 compared with ¥118.84 late Thursday.

How do negative interest rates work?

Central banks use their deposit to influence how banks handle their reserves. In the case of negative rates, central banks want to dissuade lenders from parking cash with them. The hope is that they will use that money to lend to individuals and businesses, which in turn will spend the money and boost the economy and contribute to inflation.

It is also aiming to force investors to shift money out of bank accounts and into higher-yielding assets.

So this has been done elsewhere?

The European Central Bank in June 2014 was the first major central bank to venture into negative territory followed by the Swiss National Bank in December 2014. The Danish central bank has also employed negative rates to defend its currency’s peg to the euro, while Sweden’s rates are also in negative territory.

And former Federal Reserve chief Ben Bernanke has said that in the event of a serious downturn, negative interest rates are a tool that the U.S. central bank should consider.

What next?

Many economists see the Bank of Japan’s move as a testing of the waters. They expect the central bank to follow through with further cuts to the deposit rate, perhaps approaching the negative 0.75% rate in place in Switzerland.

What does it mean for other central banks?

The term “currency wars” is getting thrown around a lot this morning. The move has significantly raised expectations the European Central Bank will follow through in March with a further cut in its deposit rate and expansion of its own asset-buying program. European money market rates are pricing in a more than 100% likelihood of a 10-basis-point March cut by the ECB and an almost 100% likelihood of a cumulative 20-basis-point cut by year-end, noted analysts at Barclays.

Read: A lesson for the Fed in the Bank of Japan’s move.

Then there is the Fed. The move raises questions about the central bank’s ability to further raise interest rates in the face of a rising dollar, which highlights the widening divergence of global monetary policy.