E Japan’s Economy Is In A Negative Interest Rate Environment

“The Bank of Japan left its key short-term interest rate unchanged at -0.1 percent at its April meeting and kept the target for the 10-year government bond yield at around zero percent, as widely expected. The Committee said it intends to keep the current extremely low levels of short-term and long-term interest rates for an extended period of time, at least through around Spring 2020, taking into account uncertainties regarding economic activity and prices including developments in overseas economies and the effects of the scheduled consumption tax hike.” (Trading Economics, May 2019)

“Globally, there is more than $8 trillion in government bonds trading at negative rates. While this is great news for indebted governments, it does little to make businesses more productive or to help low-income households afford more goods and services. Super-low interest rates do not improve the capital stock or improve education and training for labor. Negative interest rates might incentivize banks to withdraw reserve deposits, but they do not create any more creditworthy borrowers or attractive business investments” (Sean Ross, Why Negative Interest Rates Are Still Not Working in Japan, Oct 12, 2018)

A negative interest rate policy (or NIRP) is an unconventional monetary policy tool whereby the central bank sets its nominal policy interest rates at a negative value, i.e. below the theoretical lower bound of zero percent.

The intention is to overcome a deflationary environment, where households and firms hoard money instead of spending and investing. The deflationary environment could cause a collapse in aggregate demand, which leads to a vicious circle of prices falling even further.

When a central bank adopts a negative interest rate policy, it charges its depositors to hold their reserves at the central bank. This is intended to incentivize the private banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep their funds safe.

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