Abenomics has, in my view, been the best attempt at reflating the Japanese economy for many years, and I’ve tipped Japanese equities for a couple of years now, on the back of the belief that the policies would work. It was never going to be easy, though – convincing a generation of people and company management that assets and prices could actually increase in value. However, the latest move to negative interest rates is a sign of desperation and was not expected. It is bad news for the banking sector, as it will cut net interest margins (the difference between which banks borrow at and lend at) even further. This is a shame as the banking system is currently strong, liquid, and very willing to lend. The trouble is that the demand which is present had already been met. Negative rates will not change this. They will only unnecessarily destabilise the banking sector, and I therefore believe this is a policy mistake.
Michael Taylor, lead economist at Oxford Economics, says No.
The fourth quarter GDP contraction was caused by a large fall in consumption. The new policy of negative interest rates – along with continued quantitative easing – is the Bank of Japan’s (BoJ) attempt to stimulate growth and reach the 2 per cent inflation target. By paying negative interest rates on bank reserves, the BoJ is attempting to encourage banks to deploy these reserves elsewhere, ideally through lending to households and companies. But there is little demand for credit – either from an ageing household sector or a corporate sector that has recently completed a prolonged deleveraging and is now sitting on a pile of cash. Negative rates may work in other ways, notably by pushing the exchange rate down. This was the impact of the BoJ announcement last month, although subsequently the yen has risen sharply. And if the policy convinces the public that the BoJ is indeed doing “whatever it can” to hit the inflation target then it may help to lift inflation expectations – vital to ending deflation. Negative rates will not harm the economy, but it is doubtful that they will do much good.