Macroscope | Japan’s big gamble on negative interest rates

Bank of Japan (BOJ) Governor, Haruhiko Kuroda, might seem an odd choice for the role of Peter Pan, but he is clearly familiar with the children’s story, having referenced it last year when speaking about the challenges facing the BOJ as it seeks to generate inflation in the Japanese economy.

“I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it,’” said Kuroda in June 2015. But Japan is not Pan’s Neverland even if the BOJ’s, albeit nuanced, recourse to a negative interest rate policy (NIRP) is an attempt to make inflation take off.

While there’s no room for doubt at the BOJ as it pursues its policy ends, its current NIRP, where a minus 0.1 per cent rate is imposed on one element of reserves placed with it by financial institutions, may prove a key turning point for Abenomics, the monetary and fiscal policy mix that has dominated Japanese official thinking since Shinzo Abe’s 2012 election victory.

Demographics will play a part.

In the novel penned by Scottish author J.M. Barrie, Neverland is populated by Peter Pan, the boy who never grew up, and his band of child followers. However, Japan is a rapidly ageing population, and their reaction to the BOJ decision might not quite be what Kuroda and his fellow policy-setters envisage.

William White, chairman of the Economic and Development Review Committee at the Paris-headquartered Organization for Economic Co-operation and Development (OECD) has strong opinions on the issue of NIRP.

“The expectation [with NIRP] is that this will lead to lower lending rates,” White said on February 9, “but you can easily think of a story where this is not the outcome because those negative interest rates cut the banks’ profit margins. And then the question is what will the banks do to restore them?”