Japan Confronts Unintended Consequences of Negative Interest Rates

choi

Latest first.

(1) Min Zeng, Investors Flock to Safe Government Debt; Bond yields across the globe slump, as flight from risky assets gathers pace. Wall Street Journal, Feb 12, 2016.

(2) Ira Iosebashvili, Anjani Trivedi and Chao Deng, Yen Surges Despite Actions by Central Bank. Wall Street Journal, Feb 12, 2016.

My comment: There is no need to read the rest of either report. I just want to use these two to show the two phenomena are here to stay -- not one-day events. Read next.

choi

Both (3)(a) and (b) are news reports in Feb 10 newspapers, to explain the unusual happenstances after Japan’s central bank announced negative interest rates but before implements them (rates).

(3)
(a) Eleanor Warnock, Yen Surge Imperils Japan Growth Plan. Wall Street Journal, Feb 10, 2016.
http://www.wsj.com/articles/japa ... -1454997661?tesla=y

Quote from print:

(i) "Hideo HAYAKAWA 早川 英男, a former BOJ official now at the Fujitsu Research Institute 富士通総研, said the monetary easing had yet to trigger a positive cycle of spending and investment. Real wages fell in 2015 for the fourth straight year, the government said Monday [Feb 8 -- and in print the paragraph stops here; online is ‘this week’].

(ii) "Economists say that the move to negative [interest] rates[, not negative bond rate, which are an unintended consequence,] was aimed [by BOJ] at weakening the yen and propping up stock prices. The opposite happened.

(iii) "On Tuesday, Japan’s benchmark 1p-year government bond yield fell into negative territory [minus 0.027%] for the first time, and the Nikkei Stock Average fell 5.4%, its biggest percentage fall in a day since June 2013. Japan joins Switzerland as the only countries where the 10-year government-bond field is negative.

(iv) "In theory, the Bank of Japan's move to negative [interests] rates should have pushed market participants into higher-yielding currencies such as the dollar or those in emerging markets. When the European Central Bank introduced a similar policy [negative interest rates] in 2014, it helped weaken the euro against the dollar.

"Instead, concern about overseas economies has caused investors to buy the yen, usually seen as a haven asset. Low interest rates also could help Japan’s economy by making it easier for businesses and the government to borrow.

(v) "Some economists say negative interest rates will eventually push investors to sell government bonds and buy other assets such as stocks and real estate, spurring investment.

My comment:
(i) A graphic that appears with this report in print has the heading "Japan Dilemma[:] Japanese government bond yields have fallen steadily in part because inflation has fallen short of target * * *"
(ii) There is no need to read the rest.
(iii) In any event, WSJ locks the report behind pay wall. But there is a copy of the online version:

http://www.pressreader.com/china ... 5045263839/TextView
(iv) The key word in the last quotation is "eventually." But economist John Maynard Keynes famously quipped, "In the long run, we are all dead." See John Maynard Keynes
https://en.wikiquote.org/wiki/John_Maynard_Keynes
(" 'But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again.'  A Tract on Monetary Reform (1923), Ch. 3")
(v) The conventional wisdom is when a nation raises interest rates, investors pull money out of bank deposit into stock market. Reports (3)(a) and (b) attempt to explain why the opposite occurs in Tokyo Stock Exchange.

choi

(3)
(b) Jonathan Soble, Japan Bond Yield Slides Below Zero and Stocks Fall; The negative interest rates introduced by the Bank of Japan alarmed investors. New York Times, Feb 10, 2016.
http://www.nytimes.com/2016/02/1 ... tive-territory.html

Quote:

(i) "On Tuesday [yesterday, Feb 9], the yield on Japanese 10-year bonds, the benchmark of government borrowing, dropped to zero [and then negative] for the first time. * * * meaning some investors were buying bonds despite knowing that if they held them until maturity, they would come away with less money than they paid.  And on top of that, a strong yen dragged Japanese stocks down more than 5 percent in the worst trading day this year.

(ii) "The reversal of bond-investor logic flows from the [Jan 29] introduction of negative interest rates [of minus 0.1%] by the central bank, the Bank of Japan, experts say.

(iii) "Like savers depositing money at a local bank, banks keep their own unused cash at the central bank. The interest they earn on those reserves — or do not earn, as the case may be — helps determine the cost of other kinds of borrowing and lending.

"By making it unprofitable for banks to hold cash, Mr [BOJ governor Haruhiko] KURODA 日本銀行(日銀)総裁 黒田東彦 hopes to encourage them to lend more freely [jargon: inject money into economy] and get businesses and households to spend. He also wants to give a lift to consumer prices [bringing about inflation], which have been sagging [deflation]

"In other countries that have introduced negative interest rates, like Sweden and Switzerland, government bond yields have also been pushed below zero.

"Masamichi ADACHI 足立 正道, a former central bank official who is now an analyst at JPMorgan Chase, said that the reversal in bond yields was bound to happen eventually, given the negative interest rate policy, but it occurred more quickly than many expected. The imposition of negative rates on bank reserves will not even take effect until next week.

"a factor that is complicating Mr Kuroda’s stimulus program: a rush by global investors to buy the yen [with dollar due to 'fears about a US recession' stated in the next paragraph], which is seen as a safe currency at a time of economic uncertainty. The resulting rise in the yen’s exchange rate [relative to dollar] has hurt the Japanese stock market [see (e)] and darkened the outlook for inflation, canceling out much of the efforts of the Bank of Japan, or BOJ.

(iv) "One goal of negative interest rates is to redirect investors’ money from bonds into more theoretically productive assets like property and stocks.

(v) "This week the yen has strengthened to a little over 114 to the dollar, about 10 percent stronger than its most recent low. That is bad news for the many Japanese companies that earn revenues outside Japan: the stronger the yen, the less their foreign-currency earnings contribute to profits.

"The Nikkei 225-stock average dropped 5.4 percent Tuesday, its biggest one-day drop since May 2013, as investors reacted to the potential blow to corporate earnings.

(vi) "Easy money from the central bank [quantitative or monetary easing] had kept the yen relatively weak since 2013, but a reversal appears to be gathering pace despite the central bank’s latest move.

"Japan’s status as a haven for investors can seem puzzling. It is carrying the heaviest government debt load in the world, at the equivalent of about two and a half years’ economic output. But most experts are sanguine about the risks. The debt is still amply funded by local savings. And taking the private sector into account, Japan as a whole is a major net creditor, not a borrower. That greatly reduces the risk of instability.

choi

(4) Negative interest rates have built-in inertia. That is, even without global investors seeking safe havens to park their money, negative interest rates may not be such a great monetary tool (to inject cash into an economy).

Interest rates | Negative Creep. The negative-rates club is growing. But there is a limit to how low rates can go. Economist, Feb 6, 2016.
http://www.economist.com/news/le ... n-go-negative-creep

Quote: "Not so long ago it was widely thought that, if interest rates went below zero, banks and their depositors would simply switch to cash, which pays no interest but doesn’t charge any either. Yet deposits in Europe, where rates have been negative for well over a year, have been stable. For commercial banks, a small interest charge on electronic deposits [at a central bank] has proved to be bearable compared with the costs of safely storing stacks of cash—and not yet onerous enough to try to pass on to individual depositors.  That has resulted in an unavoidable squeeze on profits of banks, particularly in the euro area, where an interest rate of -0.3% applies to almost all commercial-bank reserves. (As in Switzerland and Denmark, Japan’s central bank has shielded banks from the full effect by setting up a system of tiered interest rates, in which the negative rate applies only to new reserves.) * * * Banks in Europe have started to pass on some of the cost of negative rates to big corporate depositors. Their only ready alternative to stashing large pots of cash is safe and liquid government bonds, whose yields have also turned negative, for terms of up to ten years in Switzerland.

Note:
(a) "IMAGINE a world in which tax offices harry people who file their returns promptly; where big supermarket chains pay their suppliers before the goods fly off the shelves and not months afterwards; and where a pre-paid annual gym membership is more costly than paying month by month. It sounds fanciful, absurd even. Yet such a world came a step closer" with negative interest rates.

"Came a step closer." That is because Japan has been inflicted with deflation for years. Deflation in and of itself may cause the phenomena.

(i) in and of itself: "[McGraw-Hill Dictionary of American Idioms and Phrasal Verbs:] considering it alone; [Cambridge Dictionary of American Idioms (2003):] without considering anything else"
http://idioms.thefreedictionary.com/in+and+of+itself
(ii) Jane Straus, In and of Itself. GrammarBook.com, Jan 19, 2007 (blog).
http://data.grammarbook.com/blog ... nd-of-itself-usage/

(b) On January 29th "Japan’s central bank cut the interest rate on bank reserves to -0.1% (see article)."

You should not read the "article" which is more about politics in Japan (than economics), through the prism of Abenomics. It adds nothing.
(c) "Like its peers in Denmark, the euro area, Sweden and Switzerland, the Bank of Japan will charge commercial banks for holding deposits with it. * * * Borrowing costs across Europe have tumbled, helping the fight against deflation and driving down exchange rates [. On the contrary, too much euro makes it cheap]."

That is the list of nations with negative interest rates. But quotation (iii) of report (2)(a) only mentions Switzerland but not Sweden. I do not know which list is exhaustive.