NEGATIVE INTEREST

RATE
In Sweden, Denmark, The ECB and The BOJ

What is negative interest rate?

A negative interest rate means the central bank and perhaps private banks will charge
negative interest: instead of receiving money on deposits, depositors must pay regularly to
keep their money with the bank.
An example:
An annualized 2% interest rate on a $100 loan means that the borrower must repay the
initial loan amount plus an additional $2 after one full year. On the other hand, a -2% interest
rate means the bank pays the borrower $2 after a year of using the $100 loan, which is a lot.

The negative interest rates on Sweden,

Denmark, ECB and BOJ:

Brief history of the four countries:

On 2nd of July 2009, Sweden's Riksbank was the first
central bank in the world to implement a negative
interest rate, when it lowered its repo rate (the rate at
which a central bank lends short-term money to
commercial banks against securities) to 0.25%.
This caused its linked overnight deposit rate (the
interest commercial banks get for depositing money
with the central bank overnight) to be pushed down to
-0.25%, while the overnight lending rate (the interest a
central bank charges commercial banks for overnight
lending) was lowered to 0.75%.

SWEDEN

This was done to counter economic slowdown due to

the financial crises of 2008.

Brief history of the four countries:

Began in July 2012 when the Denmark National Bank set its
deposit rate below zero to protect its economy from an influx
of hot money as the Eurozone debt crisis escalated.
After a period of being back in positive territory, it imposed a
-0.75% rate on certificates of deposit from September 2014.
The immediate objective is to prevent the currency rising too
much.
The idea of lower and negative interest rates is to discourage
investors from buying the local currency, which tends to push
its value up.
The aim was to cap an unwanted rise in its currency, which
was pushed higher when foreign money flooded into the
country.

DENMARK

Brief history of the four countries:

In June 2014, the European Central Bank became
the first major central bank to adopt negative rates
when it cut the interest rate on its deposit lending
facility below zero.
A second cut followed a few months later in
December 2015, to its current level (minus 0.3%).
Deposit facility interest rate cut effective as of 11
June 2014.

ECB

To prod commercial banks to lend more money to

businesses and consumers rather than maintain
large balances with the Central Bank.
Forcing the banks to leverage its balance sheet to a
higher level or the ECB will penalize the banks by
charging interest on their deposits.

Brief history of the four countries:

On February 16, BOJ implemented a negative
interest rate policy for the first time in its history.
This is in accordance with a decision made during
its monetary policy meeting on January 29.
This monetary easing, which imposes a minus 0.1
percent interest rate on a portion of the new
reserve accounts held by private financial
institutions at the central bank.
The BOJ said the move to negative interest rates
was intended to support Japanese business
confidence and to signal its determination to get
inflation moving towards the target of 2%.

BOJ

SWEDEN AND DENMARK

Sweden of Negative Interest Rate

Developments in the Swedish economy
have been somewhat stronger than
expected, while uncertainty remains
globally.
There has been an upward trend in
inflation since last year, but it is not yet
on a firm footing.
To safeguard the resilience of the upturn
in inflation, monetary policy needs to
remain very expansionary.
The Executive Board of the Riksbank has
therefore decided to hold the repo rate
unchanged at 0.35 per cent.

Strong development of the Swedish economy

Growth in the Swedish economy has been slightly
stronger than expected since October. Demand has
broadened.
To household consumption and housing investment,
exports and business sector investment are also
contributing to the growth.
In the coming years, refugee immigration is expected
to help boost demand in Sweden.
Public consumption will increase first and foremost in
connection with the arrival of the refugees, but also
private consumption will increase.
Supported by the expansionary monetary policy, GDP
is expected to grow by more than 3 per cent on
average during the forecast period

Inflation not yet on a firm footing

Broad economic upturn, there has been
upward trend in inflation throughout the
year and inflation expectations have
stabilised and rise.
Inflation is rising is still mainly due to the
weak krona, which has contributed to a
rise in the prices of imported goods and
services.
The contribution to inflation made by the
depreciation of the krona is expected to
decrease next year.
To support domestically-generated
inflation, continued high levels of
demand are needed in the Swedish
economy.

Expansionary monetary policy

The Riksbank's very expansionary monetary policy is
contributing to good growth, falling unemployment
and an upward inflation trend.
Growth in the Swedish economy has been slightly
stronger than expected since the October Monetary
Policy Meeting.
Inflation is still not on a firm footing and to
safeguard the resilience of the upturn in inflation,
monetary policy still needs to be very expansionary.
Purchases of government bonds will continue in line
with the decision in October.
Purchases will thereby amount to a total of SEK 200
billion at the end of June 2016.

Risks associated with household indebtedness

must be managed
Reduce the risks of household
indebtedness in different reforms are
needed.
Both create a better balance between
supply and demand on the housing
market and reduce the incentives for
households to take on debt.
If no measures are taken in
combination with the low interest rate
level, will increase risks.
Such a development could ultimately
be very costly for the national
economy.

Denmark of Negative Interest Rate

Negative interest rates began in July 2012
when the Denmark National Bank set its
deposit rate below zero to protect its
economy from an influx of hot money as
the euro zone debt crisis escalated.
The goal was to defend to currency
policy.
Reduce the pressure on currency in July
2012 by having a negative deposit rate
between July 2012 and April 2014.
It imposed a -0.75% rate on certificates
of deposit from September 2014

The Monetary Deposit rate

Danish banks and mortgage
institutions have excess liquidity
and with money markets trading
at negative rates.
Low monetary policy rates leave
a limited leeway for a reduction
of Denmark's National banks
lending rate.
Monetary deposit rates determine
the money market rates and the
exchange rate.

Lending and deposits

Positive net position with the central
bank, increased due to DNBs purchases
in the foreign-exchange market and the
increased foreign-exchange reserves.
Deposit rates played in stirring money
market rates compared to the central
banks rate on lending.
Major tool to maintain exchange rate
stability versus the euro.
Negative deposit rate, the volume of
liquidity held in the certificates of
deposits facility slightly decreased, while
the liquidity parked in the DNBs current
account went up.

No unusual increase in the circulation of cash

Can circumvented by holding cash rather
than depositing money in a bank account.
Holding large cash amounts entails
substantial costs, including costs for
secure storage and transport.
For households, this reflects that their
bank deposits do not accrue interest at
negative rates.
But banks and firms to not seem to be
switching from bank deposits to cash
either.

EUROZONE INFLATION FALLS

RAISES THE POSSIBILITY OF
DEFLATIONARY SPIRAL

Falls of Inflation Rate

Raising of prices
but a slower rates

Decrease of
aggregate demand

Lower economic
growth

Deflation
(decline of prices)

Deflations
Reduction of the general prices.
Declining of general prices.
Caused: Decreasing government, investment or personal spending
Lower level of unemployment rate.
Central bank stop severe deflation along with severe inflation in an attempt
to keep the excessive drop in prices to a minimum.

Deflationary Spiral
Period of decreasing prices leads to a situation whereby the economy cannot
recover.
Employment
Demand
Supply
Profit

Hoard
Money
(consumer)

Conclusion:
Implement the negative interest rate policy that only
applied to bank deposits intended to prevent the Euro from
falling into deflationary spiral also to increase the monetary
reserve.

JAPAN
(ABENOMICS)

Japan
Abenomics:
Multi-pronged economic program
Introduced by Prime Minister Shinzo Abe
To achieve economic growth
Three arrows
- Fiscal Policy
- Monetary Easing
- Structural Reforms

Fiscal Policy
Increase government
consumption and
public works
investment.
Introduced 5.3 trillion
in public works
spending as part of its
2013 budget.
Estimated 5 trillion in
year 2015.
Government is
pledging to be flexible
with regard to fiscal
policy in coming years

Monetary Easing
Increasing the nations
money supply.
Pumping the cash into
the monetary system.
Basically consists of
printing additional
currency and supply
more funding to the
market.
Purpose To reduce
the cost of borrowing.
Central Bank
accommodates to set
the negative interest
rate.

Structural Reforms
More complex.
Reform program aimed
to make structural
improvements to
Japanese economy or a
reform of various
regulations to make
Japanese economy
more competitive.
Try to narrow the gap
between the countrys
regular and often strict
labor market

Factors For Bank of Japans Negative

Interest Rates
i.

Force banks to lend money to stimulate economic growth

From 2014, bank lending is no longer increasing.

 Japan fell into a recession due to Abenomics sales tax hike in year 2014.

Banks cant lend more since lack of demand of loans due to the recession.

ii.

Prevent deflation
BOJ had an official commission to keep inflation at 2% to encourage consumers to make
purchase instead of keep the cash.
The increase in consumption will lead to more investment and employment.
Inflation rate in Japan was 0.0% in January 2016.

iii.

Fear in China
China equity market plunged three times in seven months from June 2015 to January 2016.
Chinas stock market plunged another 6.4% on January 2016.
Japanese stock market was pulled down by 11% due to the China worries in the second week
of Feb

iv.

Declining oil prices

Japan is an oil importing country.
Declining oil prices are supposed to be an economic boost.

v.

European influence at Davos

ECB is the first bank in the world which set the NIR in June 2014and it followed up with a
further cut on December 2015.
There was a constant growth above 1% after two quarters, successfully stimulate the growth.

 In theoretical, Abenomics is workable; in fact,

Abenomics didnt really achieve good results.
Has a mix picture of impacts.

Impacts on Investment Nikkei 225

After Abenomics was launched, the monetary easing has occurred simultaneously with a strong recovery
in Nikkei 225 stock.
Nikkei stock market index started to rise from 2012 until 2015.
Nikkei 225 reaches 12,000, recovering to position before the 2008 crash.
Kuroda Haruhiko becomes BOJ governor in March 20, 2013.
BOJ decided on new level of monetary easing in April 4, 2013.
Nikkei 225 then breaks through 15,000 in May 15, 2013.
Nikkei 225 reaches 15,900 level then falls suddenly in May 23, 2013.
It plunged almost 10% before rebounding.
This makes it the most volatile stock market index among the developed market.

 By 2015, it hit a peak over 20,000 marks and it marks a gain of over 10,000 in 2 years.
As a result, Nikkei 225 was known as one of the fastest growing stock market indexes in the world.
After that, Nikkei 225 stock market index continues to rise steadily.
However, it started to have a reverse result after the negative interest rate was introduced.

Impacts on Japanese Yen

Dramatic weakening of Japanese Yen.
Yen weakened from around 82/$ to 103/$
Weakening of the Yen due to the extremely accommodative monetary policies of BOJ.
Yen reaches record high as euro weakens in 2012.
BOJ decided on extraordinary monetary easing in April 2013.
BOJ announced that they would expand their Asset Purchase Program by $1.4 trillion in two years.
The amount of purchases is large that it is expected to double the money supply.
Then, people started to concern about the authorities in Japan deliberately devalue yen in order to boost
exports.

Impacts on Japanese Yen

But, the commercial sector in Japan worried that the depreciation would spark an increase in import
prices, especially in energy and raw materials.
Yen depreciated around 40%
The Yens sharp fall pushed up the earnings of globally-operating large firms to record levels, and the
flowing share prices boosted the assets of wealthy consumers.
Yen weakened to 100/$ for the first time in May 9,2013 since 2009.
Weaker yen led to higher import costs for many small and medium-size businesses.

 After NIR was introduced in Japan, Yen did reverse its depreciation trend but than weakening proved to
be very short-term lived
BOJ try to weaken the Yen once more but without much success

Impacts on Unemployment Rates

Unemployment rate decreased from 4.0% in the final quarter of 2012 to 3.7% in the first quarter of 2013.
The unemployment rate was constantly decreased.
Unemployment rate still continue to drop after the NIR introduced.
Japans unemployment rate is at an excellent level which is 3.3%
It is the level that the western economies unlikely to reach.
In fact, Japans labor market never reaches over 5% of unemployment at its worst records.
Unemployment rate in Japan averaged at 2.72% from 1953 until 2016.

 Job vacancies reached the peak which is 919.23 Thousand in December 2015
Job vacancies in Japan increased to 911.35 Thousand in February from 896.09 Thousand in January 2016
The average of job vacancies is 518.73 Thousand from 1960 to 2016

 When the economy get rough, the wages is possible to fall.

When the wages tend to fall, people will keep working to earn more money

Impact on Consumer Spending

Consumer spending increased
steadily until 2014.
After that decreased to 304389.90
JPY Billion in the end of 2015
from 307031.90 JPY Billion in the
third quarter of 2015.
Average consumer spending is
255927.31
Japan reached highest consumer
spending which is 321816.70 JPY
Billion.

Impact on Consumer Spending

Sales tax rate in Japan now stands at 8%
Average sales tax rate in Japan is 5.60% from 2006 to 2015.
Japan run the 5% sales tax rate until 2013.
Japan increased sales tax rate from 5% to 8% in 2014 to balance the national budget.
The increase the sales tax rate in Japan marked the inflation.
When sales tax rate is higher, people tend to spend less.
The tax hike was expected to discourage the consumption.
Thus, NIR is set to encourage the consumption and investment.
NIR will reduce the cost of borrowing and it supposes to encourage the consumer to spend more and
invest more.

 In fact, consumer spending still remains in downtrend after NIR is launched

Is the NIR working?

o Effectiveness of NIR is open for debate.
o When BOJ can force Japanese banks to lend, the first consideration is Who the banks should lend their
money to?
o Banks were unable to find enough creditworthy borrowers to lend their money although they tried so
hard to lend and stimulate the economy.
o In theory, the policy of setting NIR should reduce the costs for firms and households and thus increase
the demand for loans.
o In practical, theres a risk that the policy might have more disadvantages than advantages.
o The customers will not willing to pay to the banks for holding their money.
o But there is a concern that the policy affects the banks profitability because they are forced to lower
interest rate on loans more than those on deposits.

Is the NIR working?

o When the banks absorb the cost of NIR themselves, their profit margin between their lending and deposit
rates will be squeeze.
o It might make them less willing to lend.
o However, the bank are believed will gain the benefit in the long-term view since NIR will support firms
and households and help to prevail over deflation.
o Some large Japanese banks plans to lower mortgage rate and this plan is expected that can slow down the
deflation.
o There is no evidence to say that it had worked.
o It is not easy to decisively break out of a growth slump associated with the bursting of financial bubble.
o It is not a sanguine situation if the economy stuck in a low growth system.
o It affects the current growth and future potential.

Why Sweden success in NIR but Japan only get

the mix picture?
Sweden is one of the countries which implement NIR.
The interest rate is set until -0.5%
At -0.5%, the benchmark repo rate is higher than benchmark rates in Switzerland and Denmark, but
lower than rates in Japan and the Eurozone.
Sweden is achieving its growth and inflation goals.
The market is currently set at negative rates until 2018.
However, the output gap may have completely closed.

 Both Sweden and Japan run NIR.

Sweden success in NIR but Japan experienced a mix picture of results or may be worsen.
Japan is facing an important issue which is aging population in Japan.
Aging population is unwilling to spend and take higher investments risks.
The total population in Japan was estimated at 126.8 million people in 2015.
The population of Japan is in the downtrend.

 Japan is aware of their nations demographic challenges.

Population decreased and the proportion of people of working age continues to decline.
While life expectancy continues to increase, Japanese people are aging fast.
The aging population problem in Japan is a result of the lowest fertility rates combined with the highest
life expectancy .
Decline in childbirth caused by few factors:
Fewer and later marriages
Increased participation of women in workforce
Decline in wages
Small living spaces
High cost of raising a child

All these factors are the key affect to the total fertility rate.

Aging population is basically not a productivity group so it can be a burden to economy since most of
the old people spend money only.

 Life expectancy of Japan is the highest in the world which is 84 years for average.
Life expectancy at birth has increased the mandatory retirement age.
Based on the study, Japan should raise its retirement age to 77 to remain its worker-to-retiree ratio.

Main concern of negative interest rate

Recommendations
i.

The policy should encourage commercial banks to make loans to avoid charges on cash in
excess of mandatory reserves.

ii.

Sub-zero rates have the potential to weaken a nation's currency, making exports more
competitive and boosting inflation as imports become more expensive.

iii. Lowering short-dated government bond yields, negative rates should increase the relative
appeal of equities, helping that market.
iv.

Negative rates may complement other easing measures (like quantitative easing), and signal
central bank resolve to tackle persistently below-target inflation.

Thank You