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

The Bank of Japan introduced its negative interest rate policy in January 2016 when it announced that it would charge banks 0.1% for parking additional reserves with the BOJ. The intention was to encourage banks to lend and prompt businesses and savers to spend and invest. In other words, the Bank of Japan deliberately pushed interest rates below zero after years of keeping the rates very low. 

The original announcement briefly drove down the yen and buoyed Japanese share prices, and markets quickly went into reverse. Japan’s 10-year government bond yield quickly fell below zero and actually stayed above zero for most of 2017 and 2018, only to decline again into negative territory this year. 

There are two reasons why central banks impose artificially low interest rates. The first reason is to stimulate the economy into faster growth by encouraging spending and investment. Lower interest rates are thought to overcome the paradox of thrift, which slows an economy down. Negative interest rates are simply a more aggressive form of this tool to generate spending, investment, and higher inflation.

The second reason for adopting low interest rates is less obvious. When governments are highly indebted, low interest rates make it easier for them to afford the interest payments. When interest rates are negative, the depositor pays the government to run a budget deficit.

When the BOJ announced its negative interest rate policy in 2016, government debt was well over 200% of GDP. Recently the debt to GDP ratio exceeded 250% of GDP.

Japan’s experience with extremely low and then negative interest rates has not been too successful, but at least the economy has been growing grudgingly over the last few years, and inflation, albeit still too low, is at least positive.

Japan’s Gross Debt To GDP Ratio

(Click on image to enlarge)

(Click on image to enlarge)

 

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