‘Negative Interest Rate’ announced in Japan
The Bank of Japan, Japan’s Central Bank, has introduced ‘negative interest rate’ regime. The Eurozone already has negative interest rates, but for Japan, the third largest economy in the world, this is the first time it has resorted to this step. It’s a move that has been on the cards for Japan’s stagnating economy for well over 10 years.
The decision to go negative came after a narrow 5-4 vote at the Bank of Japan's first meeting of the year on Friday.
"The BoJ will cut interest rates further into negative territory if judged as necessary," the Bank of Japan (BoJ) said, adding it would continue as long as needed to achieve an inflation target of 2%. The December core inflation rate was shown to be at 0.1% - far below the central bank's target
Negative interest means that the central bank has fixed a benchmark rate of -0.1% and the commercial banks in Japan will be charged by the central bank for some deposits.
This move is aimed at dissuading the banks from keeping their surplus funds with the central bank. So, the commercial banks will be pressurized to lend more to industries and trade and also for individual consumption, to fight the economic deflation.
With the country’s economy in a tailspin, the government is desperate to increase consumer spending and at one point, it issued shopping vouchers to stimulate demand.
The negative interest rate will not apply to the bank depositors. Nevertheless, the commercial banks whose margin is already under stress will be compelled to pass on this additional burden, at least in part, to their depositors in course of time. In such an eventuality, many of the depositors will stop saving with banks and look for other alternative avenues.
With the economy not in good shape, people will hesitate to invest in risky sectors. The other alternative is to spend more and this is what the government precisely wants them to do.
We all know how consumerism has ruined countries like United States where domestic savings have reached a level of $138.73 per GDP of $1,000, which is lower than a small country like Sri Lanka ($146.13 per GDP of $1,000).
Economists the world over agree that interest rates by themselves cannot determine inflation/deflation and there are other factors like domestic savings, demand for goods and services, employment creation, taxation policies of the government, foreign exchange inflows and outflows, forex rates, external borrowings, overseas lending and investments by the government and the corporate sector and public expenditure. Corruption and generation of black money also affect the economy. In addition, education, health, longevity of an average citizen etc. also have a bearing on the economy.
In a situation of deflation, creating incremental demand for goods and services will be a great challenge. Even if the cost of borrowing is very low, entrepreneurs will show reluctance to borrow because they are not sure of selling their goods and services to break even and sustain in the well developed and highly competitive market.
In a press conference, the BoJ's Governor Haruhiko Kuroda said the weakening growth rate of the global economy was the main factor behind the move: "Japan's economy continues to recover moderately and the underlying price trend is improving steadily... further falls in oil prices, uncertainty over emerging economies, including China, and global market instability could hurt business confidence and delay the eradication of people's deflationary mindset."
Earlier in the day, fresh economic data had again highlighted concerns over economic growth. Asian shares jumped and the yen fell across the board in reaction to the announcement. Japanese banks saw their shares drop on the news and as lenders, they are likely to see their margins squeezed even more.
It may be recalled that there are too many banks in Japan and because of lending below the market rates to the corporate sector without matching collateral security, many banks have failed in recent times.
Some analysts have expressed their doubts over how effective the rate cut will be.
Date: 30-01-2016 pannvalan
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