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A D I T K U M A R , A N A N YA K U N D R A , R I C H A R E B E L L O , S A N YA B AT R A , YA S H B H A S I N

NEGATIVE INTEREST

GROUP 7
RATES: THE BANK
OF JAPAN
EXPERIENCE
 THE NEED FOR UNCONVENTIONAL POLICY
– PROBLEMS WITH JAPAN
• Traditional monetary policy had stopped working and Japan was facing twin issues:
deflation + weak growth

• Fall in global crude prices further exacerbated the deflationary situation

• Increase in taxation leading to reduction in personal spending by consumers

• Demand was already declining as a result of an ageing population that preferred to save
more

• Thus, the aim was to enhance lending and investment and stimulate spending in order to
boost the economy

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 QUANTITATIVE AND QUALITATIVE EASING
2013 - Central bank applied Quantitative Monetary Easing (QE) by buying Japanese Government Bonds.

2014 - Government increased Japan's consumption tax from 5% to 8% to pay for social welfare spending and
consumers reduced their personal spending while markets remained in turmoil.

To relieve recessionary pressure, the Central Bank was forced to progress to a second, open-ended phase of
quantitative and qualitative easing (QQE).

Need - Governor of the BOJ and the Central Bank’s Policy Board announced a radical plan-the introduction of
QQE with a negative interest rate - to achieve inflation of 2% in the shortest time.

Actual Impact - Investors exhibited more risk averse behavior, banks stocks fell. 
To fund higher wages, companies needed to be confident about Japan's future growth but unfortunately, they
lacked confidence and had low expectations of economic growth, thus this increase in easy money did not
translate into higher spending.

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 • On 16 Feb 2016, a negative interest rate of -0.1% was added to all current accounts that
financial institutions held with the central bank.
• Thus, banks that deposited money with the central bank after this date essentially lost money.
• The strategy was to make banks lend their excess liquidity to industry rather than stash it away
as deposits.
• A three-tier system was created for deposits
• BOJ’s policy exerted a strong downward pressure on the entire yield curve, flattening
corporate lending margins
• Overshooting inflation targets and maintaining the 10-year yield at zero
• Abenomics was not groundbreaking. It accumulated one of world's highest public debt

Negative Interest Rates and Abenomics

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E C B I N T R O D U C E S N E G AT I V E DRAWING PARALLELS
R AT E S & Q E FROM THE ECB EXPERIENCE
Deflationary pressures and stagnant growth

I M M E D I AT E I M PA C T
Increased bank lending marginally
• QE schemes are being tweaked to allow for even more
Paradoxically, people increased savings in
accommodative policy
response to rate cuts
•Purchase of riskier assets such as junk bonds and “fallen
Euro fell
angels”
•Increase limits and ignoring the Capital Key
L O N G - T E R M I M PA C T •Impact of rate cuts very low.
Inflation below target for a decade •Tiering and risk to financial stability
Monetary policy at its limits •Forward guidance
Banks profitability beginning to take a hit
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STRONG SIDE EFFECTS
•While economies have benefited, low and negative interest rates come with strong
side effects for investors and financial institutions.
•Over time, negative interest rates hurt profitability by eroding banks’ net-interest
margins.

GOING BELOW THE EFFECTIVE LOWER BOUND

ARE
Can be counterproductive and cripple the economy as banks refuse to lend at such low NEGATIVE
rates and people keep saving due to fears of a recession looming.
INTEREST
RATES
H O U S I N G P R I C E I N F L AT I O N
By making it cheaper to borrow through extremely low mortgage rates, the demand for
REALLY
housing tends to rise and prices soar, making it unaffordable STABLE?
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 WHAT ARE THE ALTERNATIVES?
• Helicopter Money - Let us suppose that one day a helicopter flies over this community and drops an
additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the
community. Let us suppose further that everyone is convinced that this is a unique event which will
never be repeated
-Friedman, 1969

• Forward Guidance - Forward guidance refers to the communication from a central bank about the
state of the economy and likely future course of monetary policy.

• The large-scale purchase of foreign bonds was another alternative, which would exert a downward
pressure on the JPY

• TLTRO - TLTROs are Long term loans given by central bank at favourable cost and encourages them
to lend Consequently, the banks can invest these funds in designated sectors only through various
debt instruments

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 THANK YOU

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