Japan's negative interest rate strategy stirs up global market
- By Zhang Jingwei
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E-mail Beijing Review, March 10, 2016
We are living in an era in which monetary policies are needed in order to drive away economic crises.
On January 29 the Bank of Japan (BOJ), the country's central bank, said that it would apply a 0.1-percent fee on new deposits held by commercial banks at the BOJ--in essence adopting a negative interest rate. This is the first time that the BOJ has changed its interest rate in five years.
This is a shocking development for the Japanese economy. The BOJ said in a statement that the "quantitative and qualitative monetary easing (QQE) with a negative interest rate" policies were taken in order to boost prices and achieve a 2-percent inflation rate as soon as possible. In addition, the bank claimed that it would cut the interest rate even further if that was judged necessary.
That means that "Abenomics"--Japanese Prime Minister Shinzo Abe's inflation-oriented policy--has failed to stimulate the stagnant Japanese economy. As the monetary policy is currently in quantitative easing (QE), Japan has no other option left than to cut the interest rate even further.
The aggressive policy that the BOJ is following was pioneered by the European Central Bank (ECB) in June 2014. Besides the euro zone and Japan, other countries that are also currently applying negative interest rates include Switzerland, Sweden and Denmark.
The policy is designed to encourage commercial banks who have stored their excess reserves at the BOJ to increase their lending to businesses. Or more accurately, it is only applicable to any new excess reserves that financial institutions park at the BOJ. It is also possible that the BOJ will later apply negative interest rates to all of its deposits.
Japan's new interest rate strategy as well as its maintained monetary base of 80 trillion yen ($668.7 billion) will probably force other major economies to prolong their monetary easing policies. The year 2016 is therefore likely to follow this scenario: The U.S. Federal Reserve (Fed) will slow down the pace of its interest rate hikes, while Japan, Europe, China and other major economies will maintain a flexible and accommodative monetary policy.
QE once helped lift the United States out of economic crisis, giving hope to Japan and Europe, who are eying the policy as a panacea. However, the QE policies in Japan and Europe are not as effective as they were in the United States. Increased QE in Japan and Europe indicates that they have no better choice but to stick to QE.
Although the Fed has kick-started its interest rate hikes, it will remain cautious. On the other hand, the BOJ and ECB are resolute in their endorsement of monetary easing. Since monetary policies are so different among the world's top three economies, one should never be overly optimistic about the future of the global monetary market. China does have several policy options in its toolkit, but considering the effects of its financial actions in 2015, China is still not powerful enough to invigorate global confidence.
The key point is whether or not Japan's negative interest rate strategy will lead to a stronger U.S. dollar in the long term, causing massive depreciation among global currencies. Some people think that the depreciation of the Japanese yen is not related to the appreciation of the U.S. dollar, but in a global market environment full of risk and panic, Japan's new strategy has still pushed up the U.S. dollar abruptly.
Also, the possibility that Japan will adopt an even more extreme monetary policy in the future cannot be ruled out. The negative interest rate strategy this time was a preliminary step in efforts being taken by the Japanese Government to offset the increase of its consumption tax next year.
In the 1980s, the appreciation of the Japanese yen against the U.S. dollar as a result of the Plaza Accord contributed to the asset bubble as well as the subsequent recession in Japan. Changing from the passive appreciation three decades ago to the devaluation initiative now, Japan has set out to achieve economic recovery at any cost.
In a society with a rapidly aging population, it is not clear whether or not Japan's efforts to lift itself out of its decades-long economic quagmire will succeed. In any case, the world market's turbulent entrance into 2016 has probably dampened the Fed's plans to raise its interest rate, at least for the time being.
The devaluation of the Japanese yen will make it more likely for China's central bank to further cut its interest rate and the reserve requirement ratio. On the other hand, the yuan's exchange rate is more likely to be affected by another interest rate hike by the Fed. It is clear that the continued depreciation of the Japanese yen will increase expectations for the U.S. dollar to appreciate, in turn resulting in the Fed slowing down its rate hikes, which would consequently affect the exchange rate of the yuan.
Japan's negative interest rate strategy has nonetheless stirred up the global monetary market.
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