Koichi Hamada writes: \u00a0In a bold attempt to reflate the Japanese economy, the Bank of Japan has now pushed interest rates on deposits into negative territory. Though this policy is not new \u2013 it is already being pursued by the European Central Bank, the Bank of Sweden, the Swiss National Bank, and others \u2013 it is uncharted ground for the BOJ. And, unfortunately, markets have not responded as expected.<\/p>\n
In theory, negative rates, by forcing commercial banks essentially to pay the central bank to be able to park their money, should spur increased lending to companies, which would then spend more, including on hiring more employees. This should spur a stock-market rebound, boost household consumption, weaken the yen\u2019s exchange rate, and halt deflation.<\/p>\n
One reason for this is widespread pessimism about Japan\u2019s economy, reinforced by volatility in China, monetary tightening in the United States, and the collapse in world oil prices. But, as BOJ Governor Haruhiko Kuroda recently reported to the House of Councillors, Japan\u2019s economic fundamentals are generally sound, and pessimistic predictions are greatly exaggerated.<\/p>\n
In fact, Prime Minister Shinzo Abe\u2019s economy strategy \u2013 so-called \u201cAbenomics\u201d \u2013 has enabled Japan to stay on a reasonably positive path in highly uncertain times.<\/p>\n
Japan, like emerging economies with flexible exchange-rate regimes, may actually benefit from America\u2019s monetary tightening, as an appreciating dollar makes Japanese exports more competitive.<\/p>\n
There is no reason why the Tokyo stock market should gyrate whenever the Shanghai market shakes. Yet, even though Japan\u2019s economic situation is far from dire, introducing negative interest rates has not been treated as what it is: a maneuver to loosen monetary policy. Instead, the Japanese stock market regarded negative rates as a harbinger of greater financial risk, and speculators have remained bullish on the yen.<\/p>\n
From 2003 to 2004, the Japanese treasury purchased a large amount of dollars, thereby easing monetary conditions at a time when the BOJ was reluctant to pursue open market operations. In recent years, however, the yen\u2019s exchange rate has been determined through monetary policy, not manipulated by intervention. In general, I welcome this new approach, and thus do not recommend major interventions to change the direction of the yen exchange rate. I do, however, believe that sporadic interventions may be needed to punish speculators who are taking advantage of temporary market psychology to keep the yen far above its market value.<\/p>\n
Koichi Hamada writes: \u00a0In a bold attempt to reflate the Japanese economy, the Bank of Japan has now pushed interest rates on deposits into negative territory. Though this policy is not new \u2013 it is already being pursued by the … Continue reading ![\"Negative](\"http:\/\/www.w-t-w.org\/en\/wp-content\/uploads\/2016\/02\/Negative-Interest-Rates.jpg\")
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