Japan takes kamikaze dive below zero
On February 16, the Bank of Japan (BoJ) officially adopted negative interest rates. The move came 20 months after the European Central Bank became the first of the world’s major central banks to venture below zero, writes Chief Economist Henrique Schneider of the Swiss Federation of Small and Medium Enterprises.
The BoJ’s policy makers, who had voted 5-4 to approve the surprise measure at the end of January, took great pains to say the decision was based on global developments, not on conditions in the Japanese economy itself.
The risks they saw on the horizon are the slowdown in China, troubles in commodity-exporting emerging markets and the overall slack in the global economy.
Obviously, the BoJ was forced to resort to such explanations because mentioning Japan’s own economic problems would be incompatible with its policy mandate. Equally clearly, everyone understood that behind all this cosmopolitanism, the BoJ really wanted to boost Japan’s business cycle.
The negative rate has a very limited scope, applying only to new excess reserves deposited at the central bank. It leaves untouched the $2.5 trillion of excess reserves that Japanese banks have already accumulated.
Why, then, was the decision important? Chiefly, because it signals policymakers’ recognition that quantitative and qualitative easing will not nudge inflation back to Japan’s 2 percent target.
It is also an open acknowledgement that Prime Minister Shinzo Abe’s policies are not working. Abenomics – his system of temporary tax cuts and heavy government spending – has failed to spur growth.
Will negative interest rates prove a better fit?
They certainly suggest that policymakers have reached the end of their tether. While traditional options have proved ineffective, below-zero rates had never been used in a large economy before the ECB took the plunge in June 2014.
While it is still too early to tell whether this policy will be effective as a stimulus, its damaging effects are already visible. Negative interest rates distort investment decisions by creating the illusion of quick payback. Investors who anchor decisions on negative rates usually end up paying positive ones – even if they only realize it after cashing out. This fallacy is often a road to overinvestment and bankruptcy.
It is well known that negative interest rates penalize savers. Saving is essential to any economy, since today’s savings are tomorrow’s investments. By penalizing savings, negative rates discourage future investment and long-term thinking.
In developed economies with social security systems, negative interest rates also worsen the lot of contributors to mandatory retirement plans. Future pensions lose value, effectively expropriating those who are required to participate.
Where does this leave us? Abenomics does not work – that we know. But negative interest rates are even worse. They turn rational agents into irrational short-termists, penalize the less affluent and effectively expropriate the working class.
In this light, the BoJ’s actions appear not just desperate – they are suicidal.