On January 29th, 2016, the Bank of Japan surprised the markets by announcing that it will charge banks 0.1% for parking additional reserves with the BoJ. On February 16th, 2016, this controversial policy came into effect, urging banks to lend, savers to spend, and businesses to invest.
Japan has been struggling to cope with both economic and social issues for quite some time now, such as with an aging population and consistently low birth rates, a weak economy, and a more than two decades-long deflationary spiral. In an attempt to alleviate the Japanese economy from these constraints, Japanese Prime Minister Shinzō Abe introduced his well-known Abenomics policies in January 2013, consisting of “three arrows”: fiscal stimulus, monetary easing, and structural reforms. And Abe did not hesitate to implement his policies swiftly. Hoping to impose some upward pressure on the Land of the Rising Sun’s inflation rate, Abe hiked the consumption tax from 5% to 8% in April 2014, 17 years after the last time that tax was increased. Yet, similar to the BoJ’s extensive quantitative easing program [which even includes Japan’s $1.1 trillion government pension fund] and an introduction of a flexible budget deficit, the increase in consumption taxes did not have the intended and much-needed outcome of higher price levels. In September 2015, Japan fell back into deflation for the first time since 2013, and the same year also saw the Japanese economy’s real GDP contract, both in Q2 and Q4.
It will be fascinating to see how the BoJ’s latest and arguably most unconventional attempt to kick-start its economy plays out. One major problem with monetary easing is that it often has diminishing marginal effects; surprise central bank announcements can initially be quite impactful, yet a constant revision and extension of such policies – which the BoJ has been doing since the early 2000s – often turns the policies meaningless.
Then again, this is the first time that Japan’s interest rates enter negative territory, and the market’s reaction seems to effectively be confirming the radical nature of that policy. In the eleven days since the BoJ’s announcement, the Japanese benchmark Nikkei index has fallen by 8.5% and the yen is up 6.5% against the dollar. Moreover, Japanese banks’ shares have plummeted by as much as 30% over the same period. This is partly due to the timing, given that global markets were already in a tailspin over China's economic slowdown, U.S.’ rates hike and tumbling oil prices. Nonetheless, the Japanese market’s reaction highlights a certain degree of pessimism – or at least the presence of uncertainty – over the recent monetary policy’s effectiveness.
Analysts’ estimates, however, paint a less dramatic picture. Their analyses estimate that Japanese companies will gain 0.2 trillion yen from lower borrowing costs, which is merely 0.3% of corporate operating profits. Moreover, Japanese households have about half their assets in deposits while their debt is much smaller, meaning that they have little to gain from negative rates either. Estimates predict the Japanese government to be the major beneficiary from this policy; being the country’s biggest borrower, negative rates would translate to savings of 1.2 trillion yen.
Finally, one should note that the BoJ’s negative interest rate policy adds to the already significant divergence in the advanced economies’ central bank policies. While the Fed hiked its federal funds rate in December 2015 and the Bank of England’s rhetoric is turning more and more hawkish, the ECB and BoJ have done quite the opposite by implementing radical easy money policies to buoy their sluggish economies. The implications of that divergence in central bank policies for the developed world’s markets and economies, as well as for numerous [commodity-rout-] weakened emerging markets – many of which have also implemented expansionary monetary policies in 2015 – is difficult to foresee. At this stage, all that the Economics Honors Society can predict is that its members will be busy analyzing the near term effects of the BoJ’s most recent policy.