Japan: World's last negative interest economic policy may end soon
Japan, the land of rising sun may soon witness the end of an era of negative interest rates. The Bank of Japan (BOJ) is about to conclude negative interest rates and return to a conventional fiscal policy after years of unconventional economic adventurism. BOJ Governor Kazuo Ueda may soon increase the short-term rate from the current -0.1%, which would be Japan's first rate hike since 2007. Negative interest rates were introduced to weaken the currency and avoid deflation.
Impact of negative rates on inflation and economy
Hiroshi Yoshikawa, a former adviser to Prime Minister's key economic panel, stated the negative rate was "very impactful" as it made people realize how bad Japan's economy was. However, former BOJ executive director Kazuo Momma said, "The negative rate did nothing, nothing at all" to boost inflation, adding that Japan's inflation was driven by global price pressures . Negative rates were also adopted by the European Central Bank (ECB) and some of its counterparts in 2010s to combat falling prices.
What did negative interest policy achieve in Japan?
Despite the bold attempt of providing negative interest rates to debtors in Japan, its economy could never really steer clear of deflation. Only until Russia's "military operation" in Ukraine began to disrupt supplies in 2021, Japan's deflation subsided and inflation rose to 2% but settled there. However, as per experts, the end in deflation was primarily because of external factors and negative interest policy barely bore any fruit.
Global experiment with negative rates
By late 2020, the stock of bonds with negative yields reached $18.4 trillion. As inflation started to rise, ECB moved away from negative territory, leaving the BOJ as the last one with subzero rates. The effectiveness of this policy is still debated among economists. The ECB claims negative rates were successful, supporting bank lending and increasing inflation. Switzerland's central bank chief Thomas Jordan said the policy "has proved its worth" and will be used again if necessary.
Mixed verdicts on negative rates
Sweden's Riksbank abandoned the negative interest policy in late 2019, citing excessive impact on its financial system. The Federal Reserve never implemented negative rates, with researchers noting that they can be "counterproductive if implemented over a long time horizon." Last month, Japan entered into a recession which it has emerged out from in its Q4 results. Prime Minister Fumio Kishida plans to boost spending on childcare and national defense, relying on inexpensive debt to fund these initiatives.
Future of borrowing costs in Japan
BOJ Governor Ueda is keeping his options open, with this month's wage negotiations being crucial for determining whether the economy is in a virtuous cycle. As Japan moves away from negative interest rates, it will be interesting to see how the economy adapts to new policies.
