Markets’ limp response to negative rates underscores Japan’s confidence problem
Koichi Hamada says there is no sound reason for its markets to treat negative interest rates, which were meant to ease monetary conditions, as a signal of more risks to come
In a bold attempt to re-inflate the Japanese economy, the Bank of Japan has pushed interest rates on deposits into negative territory. Though this policy is not new – it is already being pursued by the European Central Bank and others – it is uncharted ground for the BOJ. And, unfortunately, markets have not responded as expected.
In theory, negative rates 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’s exchange rate and halt deflation. But theory does not always translate into practice; the policy’s effects on the yen and the stock market have been an unpleasant surprise.
One reason for this is pessimism about Japan’s economy, reinforced by volatility in China, monetary tightening in the US and the collapse in oil prices. But, as BOJ governor Haruhiko Kuroda reported, Japan’s economic fundamentals are generally sound, and pessimistic predictions are exaggerated.
In fact, Prime Minister Shinzo Abe’s strategy has enabled Japan to stay on a reasonably positive path, with the economy showing signs of steady recovery from its decades of stagnation. Even Japan’s external challenges may not be such bad news. For starters, Japan may actually benefit from US monetary tightening, as an appreciating dollar makes Japanese exports more competitive.
As for China, there is certainly reason for concern as the country struggles to shift to a more sustainable growth model. Until China reckons with the ruling Communist Party’s stranglehold on key levers of the economy, it will be a source of market uncertainty for the global economy. But, even here, Japan’s situation is not as dire as many seem to think, owing to its limited exposure to China.
Given this, there is no reason why the Tokyo stock market should gyrate whenever the Shanghai market shakes. And yet, introducing negative interest rates has not been treated as what it is: a manoeuvre to loosen monetary policy. Instead, the Japanese stock market regarded negative rates as a harbinger of greater financial risk.
From 2003 to 2004, the Japanese treasury purchased large amounts of dollars, thereby easing monetary conditions. In recent years, however, the yen’s exchange rate has been determined through monetary policy. In general, I welcome this new approach. However, sporadic interventions may be needed to punish speculators taking advantage of temporary market psychology to keep the yen far above its market value.
Koichi Hamada is special economic adviser to Japanese Prime Minister Shinzo Abe. Copyright: Project Syndicate