Japan’s negative interest rate policies have not worked

by on April 26, 2016 at 2:53 pm in Current Affairs, Economics | Permalink

Ten weeks after BoJ governor Haruhiko Kuroda startled both financial markets and parliamentarians with Nirp, the yen has appreciated by some 8 per cent against the dollar. The stock market has rebounded sharply this month, however the Topix bank index remains 11 per cent lower since the advent of Nirp.

Under such a policy, risk assets were supposed to rise, but instead demand for Japanese government bonds rallied, rewarding the risk averse. Meanwhile, even finance ministry officials concede that the deflationary mindset is more entrenched than ever. There is agreement that Nirp has backfired and such an unsustainable monetary policy cannot support growth, let alone help financial asset prices.

That is from Henny Sender at the FT.

1 Martin April 26, 2016 at 2:55 pm

Japanese government bonds are a Giffen good.

2 anon April 26, 2016 at 3:04 pm

Indirectly related: I saw a consumer financial site recommending “top mutual funds.” Among their picks was a long term corporate bond fund. Amazing, because a few years ago they would have been all about avoiding bonds (especially long term corporate) because high interest rates were around the corner.

I wonder if the “turning Japanese” meme is sinking in. I don’t mean that the US will suffer negative interest rates, but that “higher” in the sense of your dad’s interest rates are a vanishing fear.

3 David Pinto April 26, 2016 at 3:41 pm

I really think so. 🙂

4 Brian Donohue April 26, 2016 at 5:15 pm

We’ve had negative interest rates for several years now in the US, on accounta modest inflation.

Japan has negative nominal rates because they don’t have inflation. Apparently, the Japanese Central Bank is unique in its inability to produce inflation.

To your larger point: Yes, the New Normal for interest rates has been here basically since 2012.

5 Barkley Rosser April 26, 2016 at 3:15 pm

Part of the issue here is that the world of negative nominal interest rates is basically an unknown world. As a broad phenomenon rather than a temporary blip, it is historically very recent, with in fact probably the first appearance anywhere ever of nominal negative interests happening very briefly in the mid-1990s in Japan. So the vast majority of the population simply does not know what to expect. That strange things are happening should therefore not be a big surprise.

6 8 April 26, 2016 at 3:29 pm

The market interest rate goes negative during extreme deflation.
Central bank cuts interest rates to negative.
There is more deflation.

7 Todd Kreider April 26, 2016 at 3:38 pm

I wondered how far down Senders’ op-ed I’d have to go to find it. But there it was toward the end:

“Clearly the US is not Japan.”

Also, his conclusion started: “Although the US is far stronger than Japan — whether measured by demographics, potential growth rate or innovation …”

Hardly. Japan is at about the same level of innovation (a vague term) Japan is always toward the top three or so and Bloomberg has Japan as #2 most innovative when averaging across six categories. The “far stronger” U.S. is #6. Potential growth per capita, all that matters, is equal considering the GDP/capita growth has been identical since 2000. (Of course, demographics are fine and will be fine ten and twenty years from now in both countries.)

8 Art Deco April 27, 2016 at 12:32 pm

Japan’s had persistently below-replacement fertility rates for four decades and currently sports a tfr of 1.4. Their demographics are anything but fine. We have a tfr which bounces around 1.9. Not great, but something you can work with.

9 msgkings April 27, 2016 at 12:38 pm

You’re so concerned with birthrates, why didn’t you have kids?

10 Todd Kreider April 27, 2016 at 1:25 pm

I meant that Japan is fine from a growth perspective.

Here comes the next wave of robots and the power of IBM’s Watson on a smartphone.

And after that, it really gets interesting: still more sophisticated robots, the Son of Watson and don’t forget the anti-aging pills.

11 Bill April 26, 2016 at 3:47 pm

Was just in Japan and had a discussion with a person familiar with their economic problems.

What was interesting is this fact: The Bank of Japan increased its printing of higher denomination currency because people were “stuffing their mattresses” or safety deposit boxes with currency.

The other interesting fact was that the TPP was giving the current government an opportunity (e.g., excuse) to reform government agriculture policies.

Finally, read a Japan Times article about the restructuring of the Japanese electronics industry: It is all due to components. In the past, electrical engineers custom designed products; today, chips are commodities with the functionalities on the chip, and not on the layout or design of the motherboard. Assembly is done in China.

12 gab April 26, 2016 at 5:25 pm

In a world of negative interest rates, it strikes me as uninteresting (or better yet, unsurprising) that higher denomination currency for stuffing mattresses is in demand. The same thing is going on in Europe, and the Europeans are exacerbating the demand by threatening or at least discussing doing away with the 500 Euro note.

13 Bill April 26, 2016 at 7:24 pm

Well, at least there is hope in your unexpected belief in fiat currency. On this website one would have expected a response that gold was a better choice.

14 The Anti-Gnostic April 27, 2016 at 9:57 am

Fiat currency works so long as the regime is in place to enforce legal tender laws. So as long as that condition prevails, the currency is “backed” by all goods and services available for exchange. More portable, divisible and durable even than gold.

The problem is that central bankers and governments can never resist the urge to try and inflate away hard choices.

15 Brian Donohue April 27, 2016 at 10:27 am

That doesn’t seem to be the problem for going on a decade now, outside of places like Zimbabwe.

More like the opposite of the problem. Illiterates left and right swoon over the first tepid signs of inflation and policymakers toe the line.

16 Art Deco April 27, 2016 at 1:32 pm

Trading economics tracks 185 countries. Of these 2 have triple digit inflation, 10 have inflation which exceeds that experienced by the United States at the 1980 crest, 39 have inflation rates characteristic of our most disagreeable years (1969-82), and 30 have inflation characteristic of the years after the Fed restabilized prices (1983-94) and the early years of the inflation (1966-68).

Neither country in the worst category are of consequence (the more affluent is Venezuela), There’s only one sizable economy in the 2d category (Argentina, inflation rate 33% per annum); the most notable in the 3d catagory are Brazil, Turkey, and Nigeria (inflation rates between 7% and 13%), and the most notable in the 4th are India, Indonesia, and Saudi Arabia (inflation rates 4-5%). Brazil and Argentina have certainly seen vastly worse in the past.

17 B Cole April 26, 2016 at 10:21 pm

Excellent point about cash hoarding. I am not sure a modern economy can be sustained at zero inflation, as then people start to save in the form of cash, which inevitably leads to cash transactions, free of taxes.

This leads to a bifurcated economy, one in cash and below-ground, tax-free and growing, and another above-ground, heavily regulated and taxed and shrinking.

18 The Anti-Gnostic April 27, 2016 at 10:01 am

And by “modern economy” you mean “tenured bureaucrats” “rent-seeking” “regulatory capture” “transfer payments”

19 WC Varones April 26, 2016 at 3:53 pm

Well, we still haven’t tried a true helicopter drop, a printing-financed stimulus program of cash handouts or infrastructure spending.

I wouldn’t be surprised if we get to that point in this cycle.

20 Raza Parvez joseph April 26, 2016 at 4:10 pm

Will BOJ borrow money for support the economic what will be the effect on USDJPY in May 2016

21 Benjamin Cole April 26, 2016 at 7:25 pm

Send in the helicopters, send in the choppers, send in the whirleybirds, hey I say send in the B-52s. What is the point of all this tweetybirding around?

And please, no sanctimonious sermonettes from little boys in short pants about the Perils of Inflation.

I prefer to see Full Tilt Boogie Boom Times in Fat City. After several years of that, then let’s have a conversation about inflation.

22 Justin Kelly April 26, 2016 at 8:38 pm

AFAIK Japan is the post child for infrastructure stimulus spending, specializing in massive public building projects that have no other use than to transfer piles of cash from the government to the construction industry.

23 Raza Parvez joseph April 26, 2016 at 4:07 pm

I think very minimum probability to cut rate by BOJ. Fed is not hike the rate on 27 April meeting.
If BOJ is not adopt any stimulus then we will watch the 107 low in May 2016.

24 FE April 26, 2016 at 4:13 pm

Why is this a surprise? Don’t negative interest rates decrease the quantity of money?

25 cowboydroid April 28, 2016 at 12:16 am

They’re supposed to increase the quantity of loans made by lenders, since it becomes cheaper to lend it than to store it at the central bank in reserve.

I suppose the problem is that it wipes out reserves. Could you call it “fractional-reserve banking” at that point? Or is it “no-reserve banking?”

26 Keith April 26, 2016 at 4:29 pm

If you are older and your government is doing funky things with your economy, don’t you hold your money even tighter?

27 Heorogar April 26, 2016 at 6:37 pm


LA Times, August 22, 2014, “. . . low interest rate policies, designed to stimulate the economy, have cost savers about $758 billion since the end of the Great Recession, according to a study . . . ”

If the purposes of low and/or negative interest rates include to foster consumption and kick start GDP growth, they apparently are not working.

More likely they (like additional taxes on savings) annoy (cause resentment among) savers and consumers, and send signals that future product prices likely will decline. Why spend today when in a month or two goods could be cheaper? Why spend when next month your adult children and grandchildren may be out of work and need money? . . .

28 RustySynapses April 27, 2016 at 3:36 am

I would say it differently. As interest rates go to zero, the amount I have to save so that I can live off the yield of fixed income goes to infinity – so I have to save more. I think that, more than deflation or low inflation is driving behavior. Plus, I think there’s a rethinking of how much stuff we really need ( stuff versus experiences) that’s also changing behavior.

29 M April 29, 2016 at 2:16 pm

I’d say, if you’re saving because you genuinely want to save as insurance for your future and your family’s, and are averse to risky investment and to spending, then with negative rates, it seems you would just double down on the saving rather than move our money to investment and spending.

If you’re saving because you’re rather an irresponsible sort, and you’d really rather naturally be rolling the dice on investment or spending your pay, but the interest rates make saving just so attractive and tempting, then you would stop saving when rates went low or negative.

(and in both cases you’d likely respond to inflation the same way, in the former case by saving more, in the latter, by saving less).

It’s just about entirely possible, the Japanese may possibly be more often in the former category than the latter.

30 Lewis April 26, 2016 at 6:16 pm

How do you know things wouldn’t have been worse without the policy? Maybe the nominal interest rate that improves things is like -4%, in which case even a -1% rate is tight money.

Suppose that the US had 8% interest rates today and our economy was in the gutter. Then the Fed cut them to 5%. The economy would still be in the gutter, because our economy needs an interest rate near zero. But in that world, people would write on their blogs,”5% interest rates have not worked!” Nor would things even improve upon the act of the cut if it were anticipated. There would likely be no visible improvement. And yet the fact remains that cutting the interest rate to about 0% would be good policy.

31 ChrisA April 27, 2016 at 2:15 am

Exactly – and of course we don’t know the counter factual should they have not introduced the negative rates, maybe the currency would be even stronger. So I don’t get why they write it didn’t help. Sure the problem was not solved, but doesn’t that just suggest that the approach needs to be done with more vigor?

To take a thought experiment, if excess reserve rates were -100%, don’t you think that would make a difference to depositor behavior?

32 cowboydroid April 28, 2016 at 12:17 am

“but doesn’t that just suggest that the approach needs to be done with more vigor?”

Cut interest rates even lower? I thought you were joking for a minute, but it seems you might be serious…

33 Philo April 26, 2016 at 7:08 pm

“Unsustainable”–what a bogus complaint that is!

34 Benjamin Cole April 26, 2016 at 7:20 pm

Keep in mind that had the Bank of Japan stayed with conventional (obsolete?) policies, it is likely they would be in a different area recession deeper than what they had experienced in their lost two decades.
Tight money is what ruined Japan. And Indeed, that is the deeper question that Tyler Cowen should ask: has tight money ever worked in a modern developed economy?


35 Mc April 26, 2016 at 7:22 pm

the japanese have so much currency, in their own culture, that they can do things, other currencies can’t. yen shine with qualities

36 Mc April 26, 2016 at 7:26 pm

we are all effed, a meteorite is going2 wipe out the whole show

37 Mc April 26, 2016 at 7:28 pm

how r we2 keep it going, the good that is

38 Mc April 26, 2016 at 7:29 pm

thru the lil’ old bits&bytes, the simplest conceptions of things that can be ~said the logician

39 Mc April 26, 2016 at 7:38 pm

on some fine nights, one can see the glory, the epic, surrealistic, of b n here . . .

40 Mc April 26, 2016 at 7:39 pm

keeping the dialogue going tilll, . . ., somebody else gets in here

41 Mc April 26, 2016 at 7:39 pm

dear lil’ f face, nobody s heads, love is the answer

42 Mc April 26, 2016 at 7:42 pm

we got music going on, civil sensibilities, and a rhythm going on

43 Mc April 26, 2016 at 7:43 pm

and the songs are, . . . , knocking them outta the park

44 Mc April 26, 2016 at 7:44 pm

mothra girls = true love 🙂

45 Mc April 26, 2016 at 7:46 pm

the trees, the flowers, the biords . . .

46 Mc April 26, 2016 at 7:57 pm
47 So Much For Subtlety April 26, 2016 at 7:57 pm

The Japanese have to save for cultural and political reasons. They do not get much of a pension. They are faced with large and fairly unpredictable costs. The government beats it into five year olds in school that saving is a good thing.

That is not necessarily economically rational. If you have to save for your old age it doesn’t really matter what the rate of return is. You have to save anyway. If it is negative, you may have to save even more.

The problem is that Japanese people, if they are smart, can see problems on the horizon. Japan’s debt level is too high and the government can’t possibly pay it all back. That sort of uncertainty means people have to save even more.

It is hard to see what the Japanese government can actually do. What they need is more young Japanese men. That means persuading Japanese couples to have more children. That won’t work. The only other option is to break up the cartels that make everything in Japan so expensive. But retired civil servants get rich out of those so that is unlikely. So no doubt they will muddle through and hope for the best.

48 Jan April 26, 2016 at 8:08 pm

Japan will be fine. They always are. Not great, but fine. You left out that more of their women need to work and they should think about more immigration. Also less tentacle porn, too distracting, inhibits growth.

49 So Much For Subtlety April 27, 2016 at 3:48 am

As long as Japan is full of Japanese, and not Third World peasants who hate them, they will do fine. Their women do not need to work. Their women need to stay at home and have children. Immigration would be insane.

You may have a point about the tentacle porn

50 TallDave April 30, 2016 at 12:44 am

Tentacle porn is the foundation of the proud, beautiful, ancient Japanese civilization. There is even a famous set of caves with tentacle porn on the walls reputed to be over 14,000 years old.

Japan will soon have many robots. Things will be fine until the robots are given tentacles.

51 Art Deco April 27, 2016 at 1:35 pm

Japan does not have a loose associative concept of belonging and cannot develop one (nor should they) to please twits in Seattle or Frisco. Babies, not immigration.

52 Cliff April 26, 2016 at 11:48 pm

The last thing the Japanese need or would consider is immigration.

Funny that you mention debt as a problem on the horizon. If monetary easing does not result in inflation, they are free to monetize all that debt. So what’s the problem? Either they get rid of the entire debt or they get the inflation they supposedly want, right?

53 Justin Kelly April 26, 2016 at 8:14 pm

Try raising the rates really high then…. maybe causality flipped since the great depression ¯\_(ツ)_/¯

Also, obligatory econ trouble shooting video: https://www.youtube.com/watch?v=owI7DOeO_yg

54 Eliezer Yudkowsky April 26, 2016 at 9:12 pm

Okay, I’m with Sumner on this. It seems merely ignorant to suppose that a policy announcement has a gradual effect over ten weeks. It contradicts the EMH. Whatever happened in the first hour after the policy announcement was the effect on the markets. What happened over the next ten weeks was something else.

55 baconbacon April 26, 2016 at 9:32 pm

The EMH (whichever version you like) is about how fast information is transmitted through markets. There is no violation of the EMH if it takes mins, days, weeks, months or years for markets to figure out if negative rates are expansionary or contradiction because that new information is being created during that span. Sumner mistake is to confuse expectations with information, the two are not synonyms.

56 Cliff April 26, 2016 at 11:50 pm

Well the measure they took was totally milquetoast so I don’t see how there could be any new information about the effects of the policy. More likely the results we see are due to the BOJ indicating it is not going to do anything more than this, which is basically nothing.

57 baconbacon April 27, 2016 at 10:30 am

“Well the measure they took was totally milquetoast so I don’t see how there could be any new information about the effects of the policy”

This is just your opinion, and has nothing to do (right or wrong) with the EMH.

58 Cliff April 28, 2016 at 9:10 pm

Sure it does. No new information is being created so there’s no way it can be consistent with EMH for the interest rate change to be continuously affecting the market for months. What new information do you posit is accumulating?

59 TallDave April 30, 2016 at 12:34 am

Well, there is some new information about how the markets processed the old information since the old information arrived, but the markets generally figure out what the markets did pretty darn fast. It’s sort of like the cascading ionization startup conditions in an inertial electrostatic confinement reactor — everything gets ionized in a few microseconds even though most of the particles are just reacting to the reaction of others.

People kept asking why another round of QE wasn’t inflationary even as the Fed kept promising to unwind them. Well, sure. CBs are way too fearful of buying assets even when investors are brandishing a blank check in their faces, taunting them — and guess what, that isn’t a secret from the markets either.

Negative IOR by itself wasn’t enough to change inflation expectations, but we knew that already.

60 Tom Warner April 26, 2016 at 9:13 pm

The currency appreciation is odd and hard to explain. The “rally” in sovereign bonds, ie lowering of rates, is absolutely as expected.

61 Prakash April 27, 2016 at 2:55 am

A great time for the BOJ to buy up all the japanese government debt, right?
Declare an intention to exponentially increase purchases until the nominal income goals are met.

And on the fiscal side, what better time for the japanese government to issue 100, 150 or even 200 year bonds?

62 ballyfager April 27, 2016 at 9:20 am

@Benjamin Cole – when inflation takes hold you’ll wish you were dead. The so called elites don’t know what to do now. Do you think they’ll do any better when inflation starts galloping?

63 The Anti-Gnostic April 27, 2016 at 10:09 am

Here in the real world, I see McDonald’s cashiers leaving their shifts in perfectly nice cars talking into iPhones and office workers freely browsing websites on their employer’s dime. I’m confused as to what is so awful out there that has economists declaring that we cannot allow time preference for money to be priced by the market. Can anyone educate me on this?

64 The Anti-Gnostic April 27, 2016 at 10:15 am

And I could ask the same for Japan. They seem perfectly affluent, nobody’s starving or rioting. They keep inventing things. A massive tidal wave rips across their island nation and they heroically go about their business. What is this dread cataclysm out there that requires central committee intervention?

65 Lurker April 28, 2016 at 8:29 am

Previously erroneous decisions made on the expectation of future growth require further (erroneous?) decisions based on said expectation.

66 Tom P April 27, 2016 at 10:36 am

The Sumner view is right, some points:

1. Unless the exchange rate appreciation occurred *when the policy was announced*, it just shows that other stuff happened later on.

2. The yen can still depreciate against goods (inflation) without depreciating against the USD.

3. Banks are particularly harmed by low rate policies because they won’t pass on the lower rates to their funding base. So it’s not surprising they underperform during periods of easing — even if those periods are overall good for the economy (consistent with the increase TOPIX).

67 Baconbacon April 27, 2016 at 6:19 pm

#1 is clearly not true.

68 TallDave April 30, 2016 at 12:16 am

If it isn’t, you should be a very rich man by now.

69 Philo April 28, 2016 at 1:19 pm

@ The Anti-Gnostic:

“What is this dread cataclysm out there that requires central committee intervention?” It seems you don’t understand the monetary systems of the major economies nowadays. Central Banks are constantly adjusting the money supply–as things are set up, that’s their job. No “cataclysm” is needed: “intervention” is their job always, constantly, every moment.

70 Boonton April 28, 2016 at 5:47 pm

“There is agreement that Nirp has backfired and such an unsustainable monetary policy cannot support growth, let alone help financial asset prices.”

What exactly is unsustainable about printing money and buying assets with it? If the Yen has gone up 8% against the dollar then print more Yen and buy dollars with them.

71 TallDave April 30, 2016 at 12:14 am

This is so very easy — just buy assets. Buy all the Japanese bonds, buy all the US treasuries, buy bond index funds.

Buy, buy. buy.

And if you never get inflation, so what? Eventually the interest payments to the BOJ will fund the entire government. Of course, there will probably be inflation long before that, but they will have a huge pile of assets they can bludgeon it down again, with if they have to.

There is no downside here.

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