- Cecilia Barría
- BBC World News
When a country has a low interest rate, it is the worst time to save.
And that’s precisely the idea: getting consumers to spend and businesses to invest to stimulate economic growth.
After the financial crisis of 2008, many countries carried their rates at historic lows ushering in an era of “cheap money” in developed economies.
Some went even further and chose to set negative interest rates.
The first to adopt this unconventional monetary policy was Denmark in 2012. Then did Japan, Switzerland, Sweden …
Now, with the worst global economic crisis in recent decades due to the covid-19 pandemic, interest rates are around 0% in the United States and Europe.
And there are three countries that still maintain an interest rate below zero: Denmark, Switzerland and Japan.
The Asian country, which has set an interest rate of -0.1% for five years, has no plans to change it.
This has been suggested by the head of Japanese monetary policy, Haruhiko Kuroda, governor of the Bank of Japan (BOJ), who a few weeks ago declared that rates would remain “stably low” to protect the economy from the effects of the pandemic.
Shortly after assuming command of the central bank in 2013, Kuroda announced a massive bond buying program (quantitative easing) to combat the deflation, a general drop in the price level of goods and services.
The move became known as “Kuroda’s bazooka.”
As it did not produce the expected effects, in 2016 the central bank made a more radical decision: lower the benchmark interest rate to -0.1%.
That rate allowed the BOJ to charge commercial banks for some of the reserves deposited with the institution.
The goal was to encourage commercial banks to use those reserves to lend to entrepreneurs and consumers, in an effort to revive the economy and emerge from deflation.
The introduction of the negative rate in the Japanese economy was dubbed the second Kuroda bazooka by some analysts, although many use the expression interchangeably to refer to all the munitions deployed by the BOJ in those years.
“The three arrows”
Kuroda’s monetary vision was aligned with the plans of the then Prime Minister, Shinzo Abe, who since he came to power in 2012, promoted a policy known as “Abenomics”.
Abenomics goes through three pillars, or “three arrows”: an increase in fiscal spending, structural reforms and an expansionary monetary policy with the aim of leaving behind years of economic stagnation.
“Japan’s easy money policy was possibly Abenomics’ most important arrow,” Matthew Goodman, vice president of Economics at the Center for Strategic and International Studies CSIS, in Washington, tells BBC World.
The other two pillars, fiscal stimulus and structural reform, “were never applied consistently,” he adds.
The economist argues that Governor Kuroda made an aggressive effort to ease monetary conditions but adds that, even before the pandemic, the bank “had failed to meet the inflation target of 2% that was proposed.”
Despite the foregoing, “it kept the economy at a low bottom and in general contained deflationary pressures,” says Goodman.
“Moderate economic growth”
Other experts consider that the economic results have been more favorable.
“In the last decade, Japan has achieved moderate economic growth,” says Takeshi Tashiro, a researcher at the Peterson Institute for International Economics.
Despite the difficulties, the aging of the working-age population “did not prevent a sustained recovery,” he says.
Some experts consider that main measures taken by the central bank such as the negative interest rate, the massive purchase of bonds and the control of the “yield curve” were necessary actions in the face of the country’s challenges.
And although so far they have not given all the results that were expected, they have improved the economic situation in the last decade.
“It has not worked”
Paul Sheard, a researcher at the Mossavar-Rahmani Center for Business and Government at Harvard University’s Kennedy School, cautions that the monetary challenge has been complex.
“The low rate policy in Japan has not worked in the sense of allowing the central bank to achieve its meta de to provoke inflation within a reasonable period. “
Randall Kroszner, Vice Dean of Executive Programs and professor at the Booth School of Business at the University of Chicago, agrees that “it has not succeeded in bringing inflation toward the Bank of Japan’s 2% target,” but recalls that “it has been helpful. to avoid deflation. “
“Although prices have been falling for about the last six months as the impact of the pandemic is felt in Japan.”
The great challenges
In the short term, Japan has to deal with the economic challenges posed by the covid-19 pandemic.
In the long run, says Matthew Goodman, “Japan faces the 3D challenge: deflation, debt and demographics“, the latter referring to population aging.
“One could add a fourth letter D, for decarbonisation,” considering that Prime Minister Yoshihide Suga has set an ambitious zero-emissions target by 2050.
From the experience of Japanese monetary policy in recent years, Paul Sheard points out that during the period of low rates in Japan, the government promoted fiscal consolidation and tightened fiscal policy in various periods.
From that perspective, it is important that “monetary and fiscal policy should join forces to bring the economy to full employment and prevent inflation from falling too low,” he says.
A key lesson from the whole process, says Randall Kroszner, is that “ehe Bank of Japan was not aggressive at first in combating deflation“.
“Once deflation expectations take hold, Japan’s experience shows that it can be extremely difficult for a central bank to raise expectations and the price level.”
For the time being, the country will have to continue looking for ways to increase consumption and investment in the midst of a pandemic that has caused high levels of uncertainty and with an increasingly reduced young population of working age.
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Eddie is an Australian news reporter with over 9 years in the industry and has published on Forbes and tech crunch.