On January 28th, 2016, the Bank of Japan, Japan’s central monetary arm and the equivalent of the U.S. Federal Reserve, voted 5-4 in favor of adopting negative interest rates. As Lucinda Shen of Fortune explains, “Negative interest rates mean customers effectively pay a fee for parking cash in banks.” In other words, instead of accruing interest by putting one’s cash into a bank vault like normal, one would lose money in a savings account. With initial rates lowered to -0.1% for certain deposits, the idea behind negative interest rates is theoretically simple. By encouraging consumers and banks to spend and borrow, and disincentivizing savings, Japan has sought to increase inflation and bolster spending in what has been an otherwise quietly stagnating market.
And yet, ever since Japan’s decision to experiment with negative interest rates, the results have been less than assuring. Just two weeks ago, Japan’s Nikkei 225 stock average plummeted 11.1%, “the worst weekly performance for the country’s shares since the 2008 financial crisis.” Since then, markets have slightly recovered; the Nikkei 225 is currently priced at around $16,700: better than the beginning of February but still at a one year low. However, Japanese policy makers seems undeterred by recent outcomes. Less than twelve hours ago, the country began selling new 10-year bonds with a negative yield for the first time in its modern history.
History does not provide a compelling case for the continuation of negative interest rates. In 2014, the European Central Bank also attempted a brief stint with negative rates, narrowly applying the policy to bank deposits which could potentially throw an already weak Eurozone into a deflationary spiral. The results were disastrous. Initially cutting down to -0.1%, and then later to -0.3% in December 2015, analysts from Morgan Stanley report that “eurozone banks are down 28%,”in the last fiscal year alone. While a number of other countries, such as Britain, are considering also venturing into negative interest rates, the novelty of the policy combined with potential blowback to bank profits has many wondering whether there is an underlying systemic risk, waiting to implode.
Ever since the Lost Decade of the 1990s, Japan’s economy has yet to prosper at an even remote level to the bubble of the 80s. Projections by the OECD observe that Japan’s “growth is likely to slow to ½ per cent,” by 2017. As a means of comparison, the World Bank places U.S. growth at 2.4% and Indian growth at 7.9% for the same year. With a massively declining population and aging workforce, Shinzo Abe’s adoption of risky measures like negative interest rates begs the question of where Japanese growth will be a decade or two down the road. As it currently stands, the Japanese are not too happy: recent Nikkei polls have “left 50 per cent of voters dissatisfied with the government’s economic policy.”
Time will tell whether Japan’s experiment with negative interest rates come into fruition. However, if historical precedent is an indication at all when Japan’s economic policy deviates too strongly from the norm, prospects look unlikely. As Berkeley economics professor Brad DeLong notes, “Japan is now 40 to 50 percent below what the world in 1991 would have estimated their GDP to be in 2012.” A desperate attempt to salvage the remnants of a prosperous past may be exactly what Japan needs, but one might wonder whether incentivizing citizens to store their cash under the mattresses, as indicated by a surge in large cash bill purchases and a corresponding decline in electronic payments, is the correct solution.