Japan is no longer the last country with negative interest rates; understand – 03/24/2024 – Market

Containing inflation has been the obsession of governments around the world for at least the last two years. But throughout this time there was one exception: Japan.

While central banks around the world raised interest rates to contain rising prices and their impact on people’s purchasing power and living conditions, the Central Bank of Japan maintained negative rates in an attempt to achieve the exact opposite: cause prices in the country to rise.

For this reason, Japan was the last country in an inflation-stricken world to maintain negative interest rates; that is, below zero. Until this week.

On Tuesday (19), the Central Bank of Japan announced the increase in official interest rates, from -0.1% to between 0% and 0.1%. A minimal change, but it means crossing the border of positive rates.

The Japanese exception, which is now coming to an end, was the result of an effort by the monetary authority to stimulate the economy, which had been hampered for years by a context of low growth that was reflected in persistently falling prices, among other indicators.

The consensus among economists establishes that, in a healthy economy, prices should not fall, but rather rise moderately.

The world’s main central banks aim for inflation to advance at rates of around 2% per year.

But preventing prices from falling was for a long time a difficult objective for those responsible for the Japanese economy.

“Japan was one of the few [países] who have experienced negative interest rates; others [autoridades monetárias] that resorted to them, such as the Bank of England or the European Central Bank, abandoned them a long time ago”, explains Ken Kutnner, an expert on Japanese economics at the University of Massachusetts (USA), in conversation with BBC News Mundo (BBC service in Spanish).

The abandonment of the “ultra-loose” policy of the Central Bank of Japan, which had negative rates as one of its most relevant instruments, marks a turning point for the third largest economy in the world, which is now entering a new phase.

How negative interest rates work

The implementation of negative interest rates is an unorthodox and considered radical measure, which implies that, instead of receiving interest on money deposited in banks —the most common—, savers have to pay interest to maintain their funds.

The objective is to encourage the movement of money, favoring investment and consumption to the detriment of savings.

Although the measure in practice did not apply to the savings of ordinary Japanese, it affected banks and other financial entities, which were penalized if they did not mobilize their resources through the offer of credits, investments and expenses.

Why negative interest rates are now being abandoned

Global inflation has been rising persistently in recent years.

The rise in prices has been impacted by the injections of public money with which governments around the world have tried to help families and businesses during the Covid pandemic.

Another factor is problems in the supply chains of strategic commodities such as oil and cereals, worsened since the beginning in 2022 by the start of the Ukrainian War.

Although the effects were felt more slowly and gently in Japan due to the characteristics of its economy, the country’s Central Bank had been indicating for some time that an increase in interest rates was imminent.

Kazuo Ueda, governor of the Bank of Japan, insisted on the need to achieve a “virtuous cycle” in which price increases were accompanied by increases in wages.

After a long time of deflation, prices in Japan have been rising for more than a year above the target of 2% per year, which has encouraged Japanese companies to accept wage increases of around 5% in this year’s collective agreements.

In the same vein, GDP (Gross Domestic Product) growth forecasts have been revised upwards and a recent report from the International Monetary Fund indicated that inflation in Japan is now due to an increase in demand, something especially encouraging when it comes to consumers as traditionally reluctant to spend as the Japanese.

All this led those responsible for the Central Bank of Japan to the conviction that Ueda’s “virtuous cycle” “has become more solid” and they have decided to finally cross the zero interest rate threshold.

The decision and the moment in which it was adopted reveal peculiarities of the Japanese economy.

While in almost the rest of the world the monetary authorities have decided in recent years to step on the brakes on the economy and constantly raise interest rates, in Japan it has only now been decided to at least take the foot off the accelerator.

According to Kuttner, “Japan took much longer than other industrialized countries to end the expansionary policies that followed the pandemic, in part because the Bank of Japan already tried to tighten its ultra-loose monetary policy in the early 2000s and in 2006, and on both occasions it was a mistake that they had to correct quickly.”

“I suspect this time they wanted to be sure before they started raising rates,” says the expert.

Why negative rates were adopted

It was the great recession that swept the world in 2008 that led economic policymakers around the world to begin contemplating such an unusual and extreme measure as implementing negative interest rates.

At the time, it was thought that encouraging the movement of money and investment would favor the growth of developed economies, which had entered a phase of contraction and stagnation.

Thus, the European Central Bank, which governs the euro, the Bank of England, the Bank of Sweden and some others set rates below zero, something difficult to imagine before the crisis.

In Japan, only in 2016 did rates enter negative territory, but the reasons for the weak or no growth of its economy and the persistent and harmful deflation date back to before the crisis.

The country lost much of the dynamism that characterized it after the Second World War, when it experienced drastic industrial and technological development.

From the 1990s onwards, it began to suffer a kind of economic anemia that experts attributed to several factors.

With a very aging population and more concerned with saving than consuming, Japanese companies were forced to compete in a constant spiral of low prices that undermined their ability to generate profits and, consequently, to invest.

This was the trend until 2013, when the then Prime Minister, Abe Shinzo, launched an ambitious program to revitalize the economy and the Central Bank began to fire a “bazooka of stimulus”, the most emblematic of which were the reduction in interest rates. interest and the purchase of bonds issued by the government.

What results did negative rates provide for Japan

Economists give a contradictory assessment of negative interest rates.

A review of academic articles published on the topic does not lead to a definitive conclusion, not even in the case of Japan, where they have been in force longer than anywhere else in the world.

Most experts agree that, by themselves, they were not enough to increase economic growth, which was the priority objective when they were established.

The clear effects were a devaluation of the yen, the Japanese currency, which allowed the country to make its exports cheaper and increase its competitiveness, and a reduction in the State’s financing costs, which paid less interest on the debt it issued.

But by the same token, a weaker yen has negatively affected the purchasing power of Japanese households and businesses.

What will be the impact of abandoning negative rates in Japan

Whenever rates rise in any economy, there are winners and losers.

In Japan, the government will face higher costs to pay off its debt, while those paying a mortgage will see an increase in loan interest.

While banks will make more profits from the loans they grant, companies and families will have more difficulty accessing them.

In any case, most analysts and the markets’ moderate reaction to the announcement of the rate increase lead us to believe that it will not have drastic or exaggerated effects on the economy.

We must not forget that, although rates are no longer negative, they remain at zero or very close to zero, and the Central Bank of Japan has shown signs that it will continue with its policy favorable to economic growth.

No one believes that the Bank of Japan will embark on a sustained path of increasing rates, as the Federal Reserve, the central bank of the United States, did to contain prices and the overheating of the American economy.

This is due to concern about a possible relapse of the Japanese economy into its most endemic ills: deflation and lack of growth.

As Kuttner notes, “the years of deflation seem to be behind us, but we cannot forget that there were many years like that,” a conclusion that appears to be shared by officials at the Central Bank of Japan.

This text was originally published here.