Less than Zero in Japan

TOKYO – In a bold attempt to reflate the Japanese economy, the Bank of Japan has now pushed interest rates on deposits into negative territory. Though this policy is not new – it is already being pursued by the European Central Bank, the Bank of Sweden, the Swiss National Bank, and others – it is uncharted ground for the BOJ. And, unfortunately, markets have not responded as expected.

In theory, negative rates, by forcing commercial banks essentially to pay the central bank to be able to park their money, should spur increased lending to companies, which would then spend more, including on hiring more employees. This should spur a stock-market rebound, boost household consumption, weaken the yen’s exchange rate, and halt deflation. But theory does not always translate into practice; while the BOJ’s introduction of negative rates almost immediately pushed the interest-rate structure lower, as expected, the policy’s effects on the yen and the stock market have been an unpleasant surprise.

One reason for this is widespread pessimism about Japan’s economy, reinforced by volatility in China, monetary tightening in the United States, and the collapse in world oil prices. But, as BOJ Governor Haruhiko Kuroda recently reported to the House of Councillors, Japan’s economic fundamentals are generally sound, and pessimistic predictions are greatly exaggerated.

In fact, Prime Minister Shinzo Abe’s economy strategy – so-called “Abenomics” – has enabled Japan to stay on a reasonably positive path in highly uncertain times, with the economy showing signs of steady recovery from its decades of stagnation. Since Abe took office in 2012, 1.5 million jobs have been created, and the unemployment rate has fallen from 4.6% to 3.3%. Moreover, tourism has surged, and both company and government revenues have been rising rapidly.