The Truth Behind Japan’s Negative Growth Rate

Japan’s interest rate is still fluctuating at 0 to -1%, which is a sign of economic turmoil and obviously, negative economic growth. Those with ultra-low inflation or deflation, meaning falling prices associated with weak economic growth. The European Central Bank, which oversees monetary policy for countries that use the euro, introduced negative rates in 2014. Denmark, Sweden and Switzerland, which are not part of the eurozone, also have negative rates.

Japan’s central bank followed in January, announcing that it would charge commercial banks a fee of 0.1 percent on a portion of their reserves that they keep with it.

Rate Goes Negative

After declining for a decade, 10-year government bonds yields in Japan fell below zero this year.

Japan’s Interest rates are negative, Source: Bank of Japan, via CEIC Data

What does the Bank of Japan hope to accomplish?

The bank is trying to lift consumer prices, which have been sliding for most of the past 20 years. Falling consumer prices hurt corporate revenues, keeping companies from raising wages or spending on new projects.

But the bank’s efforts are foundering. Its main tool has been an extensive bond-buying program, similar to policies adopted by the Federal Reserve in the United States and the European Central Bank. Bond-buying injects money into a country’s financial system. From there, it is supposed to flow to the rest of the economy.

Are negative rates working?

Money was already cheap in Japan, and negative rates have succeeded in making it even cheaper. The yield on 10-year government bonds, for instance, fell below zero in February, meaning investors are lending the government money knowing that they will not be repaid in full.

Yet deflation has not vanished: Core consumer prices fell 0.5 percent in July. Nor has there been an explosion of new bank lending, as businesses say they can’t find enough profitable uses for funding, even if the money is cheap.

And deflation itself undermines the effectiveness of negative rates. If corporate revenues are shrinking because of falling prices, companies will find that even the most generous loan becomes harder to repay. Many potential borrowers are still telling bankers, “No thanks. Keep your cash.”

Still, people must be happy that money is cheap, right?

Not the bankers. Between the new fees they are paying the central bank and a general decline in lending income, profits at commercial banks are being squeezed by negative rates. Some analysts also think negative rates hurt broader public confidence. Policy makers are trying to show creativity in finding ways to revitalize their economies — but out-there tactics like negative interest rates risk looking more like desperation.