image: “Japanese Yen” by japanexpertna.se
by Yu Hsuan
Policy makers of the Bank of Japan (BOJ) had a heated debate over the Negative Interest Rate Policy (NIRP) during it policy meeting in the mid March. The unprecedented policy implemented by Haruhiko Kuroda, president of the BOJ, in the end of January is aimed to achieve its 2% inflation target thus help the country out of economic stagnation. However, after two month of observation, putting interest into negative territory for boosting economy seems to be a tough tool to use for the BOJ.
NIRP is an unorthodox monetary policy. Instead of gaining interest from saving, commercial banks are penalized for parking their excessive money overnight in the central bank. The concept behind this move is to force commercial bank to lend money for investments, thus spur economy growth by creating dynamic economic activities in the market. Also, theoretically speaking, a central bank apply negative interest rate would stop foreign investor hoarding the country’s money thus causes depreciation of the currency and help the country’s export. These ideal situations did not happen in Japan after the implementation of the policy, rather, seems to be backfired.
Commercial banks lend money in order to gain profit from interest. Now that the margin between borrowing and lending is squeezed, it might actually make banks more reluctant to lend. Also, banks make loans to specific customers, whom they carefully scrutinize the capital in order to absorb the risks of loan. In order to avoid further risks, bank would actually be more preserve in lending at this time.
However, even if banks would like to lend as much as they can, the economy stimulation is not as simple as injecting supplies, but to see if there are demands in the market. Martin Schulz from Fuji Institute, in a BBC interview, states “In Japan, credit didn’t expand not because banks were unwilling to lend but because businesses didn’t see the investment perspective to borrow. Even with negative interest rates, this situation will not change…..businesses don’t need money – they need investment opportunities. And that can only be achieved by structural reforms, not by monetary policy,”
The main target of Japanese NIRP is to raise the countries inflation to 2%. Deflation has been a headache to Japanese government for two decades. However, the unprecedented cheap oil in the global market causes other commodities price remaining low. Also, the low price in global raw material industries has influenced Japanese manufacturing sector due to its huge demand on fuels and industrial metals. While prices in global commodity and raw material remaining low, fight for the long-term deflation in the country would be unlikely.
As to Japanese Yen, the NIRP has totally failed in depreciation of its currency. After the launch of NIRP in the end of January, Yen did depreciate as the stocks market reacted to the policy. But it does not last long. Yen strengthened dramatically right after the outburst. The reason is because its reserve-currency heaven asset status and the speculation, the so-called hot money, pulling in after QE policy that massive money is flowing in the market. The appreciation of Yen would further difficult its exports.
It is reasonable that the policy makers are turning their backs towards such unpopular policy. However, the NIRP is still in its very early age, withdrawing it right now would definitely cause confusion in the markets and among investors. What Japan should do is not to rely solely on the monetary policy such as Quantitive Easing and NIRP to spur its economy, but to implement structural reform alongside with them.