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Bank of Japan, in a Surprise, Adopts Negative Interest Rate

nytimes.com

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Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate

#51

Post by ascorbic »

derefr wrote: post #47
dzdt wrote: post #44

The backstory here is demographics. Japan has a shrinking, aging population and almost no immigration. With fewer people there are naturally less things bought, sold, and produced. Japanese authorities have been trying to pump the economy by deficit spending (central government borrows money and spends it), quantitative easing (central bank buys long term private debt, increasing the money supply for short term spend…

Question: if the government doesn't want people "parking their money" in government bonds at all ... then why not just stop issuing government bonds altogether, thus giving banks no choice but to invest in the market instead? Is that somehow impossible? Would it make the market illiquid? Are there laws concerning the required volatility caps for the securities backing savings accounts that would have to be relaxed?

This isn't about government bond rates. It's the rate for overnight deposits at the central bank. Here's an article that talks about the alternative to this: holding cash. http://www.economist.com/news/finance-and-economics/21679231...

Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate

#52

Post by stephenboyd »

derefr wrote: post #47
dzdt wrote: post #44

The backstory here is demographics. Japan has a shrinking, aging population and almost no immigration. With fewer people there are naturally less things bought, sold, and produced. Japanese authorities have been trying to pump the economy by deficit spending (central government borrows money and spends it), quantitative easing (central bank buys long term private debt, increasing the money supply for short term spend…

Question: if the government doesn't want people "parking their money" in government bonds at all ... then why not just stop issuing government bonds altogether, thus giving banks no choice but to invest in the market instead? Is that somehow impossible? Would it make the market illiquid? Are there laws concerning the required volatility caps for the securities backing savings accounts that would have to be relaxed?

Like most countries, Japan's government runs a deficit and depends on selling bonds for funding.

Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate

#53

Post by neximo4 »

nabla9 wrote: post #41
wrong_variable wrote: post #3

I do not understand this. Japan imports almost all of its oil and commodities. Shouldn't low price of oil and commodities result in a massive surplus for a country that sells high value added goods ? Buy iron for cheap and sell robots for a high price. Now the argument many people will make is that the people who are buying the high-value added goods won't have money anymore - but the argument can be made in the oppo…

I think you are confusing exchange rate mechanism and domestic economics and their interactions. Deflation does not mean that exchange rate of Japanese yen increases relative to other currencies. Japan has free floating currency with inflation-targeting framework. Japan's import-export balance adjusts more or less automatically because the currency floats relative to other currencies. Japan has very little foreign de…

> Deflation does not mean that exchange rate of Japanese yen increases relative to other currencies.

There is evidence that shows over the long run a currency's exchange rate will be favoured against those with a positive inflation rate differential.

Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate

#54

Post by ghshephard »

riskneural wrote: post #32

I remember, in 2009, spending the effort to go through the code to make sure we had a check to set the interest rate to zero if it went negative in the simulation. Because negative interest rates make no sense, right?

Negative yields have been very common in the last 2-3 years, perhaps not when the bond is initially sold, but certainly after the bond starts trading - when the negative yield also takes into accounts expectations around currency risk. A currency that is expected to hold it's value (like the US Dollar) - is a very desirable place to park your money if you believe other currencies will drop. And, as you purchase those bonds, and drive up the price, you drive down the yield.

So, while negative yields on savings accounts are pretty new and strange thing, negative yields on bonds aren't entirely unexpected.

Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate

#55

Post by neximo4 »

guard-of-terra wrote: post #11
wrong_variable wrote: post #3

I do not understand this. Japan imports almost all of its oil and commodities. Shouldn't low price of oil and commodities result in a massive surplus for a country that sells high value added goods ? Buy iron for cheap and sell robots for a high price. Now the argument many people will make is that the people who are buying the high-value added goods won't have money anymore - but the argument can be made in the oppo…

Oil is cheap because China is having problems. And they were perhaps selling robots to China. Yes, cheap commodities should benefit Japan but when they're cheap because demand is weak, Japan suffers from that too.

It can be said the main reason oil is cheap is for political reasons.

Saudi Arabia has saved up a large stash over the past few decades & it would not like its regional power states to be taken away in wake of the removal of Iranian sanctions. At least not for a while.

The Saudi oil ministry intentionally lobbied for increased production as soon as they became aware Iranian oil sanctions could be removed.

If game theory is used to analyse the situation, it serves them best to encourage the oil price to stay low & everyone else is incentivised not to cut production either.

Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate

#56

Post by Cthulhu_ »

dzdt wrote: post #44

The backstory here is demographics. Japan has a shrinking, aging population and almost no immigration. With fewer people there are naturally less things bought, sold, and produced. Japanese authorities have been trying to pump the economy by deficit spending (central government borrows money and spends it), quantitative easing (central bank buys long term private debt, increasing the money supply for short term spend…

Wouldn't it be acceptable to just accept a shrinking economy and change policies in such a way to deal with it? i.e. shrink the police and armed forces, public services, cut needless spending, etc. Become more frugal as economy allows.

Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate

#57

Post by Hermel »

dzdt wrote: post #44

The backstory here is demographics. Japan has a shrinking, aging population and almost no immigration. With fewer people there are naturally less things bought, sold, and produced. Japanese authorities have been trying to pump the economy by deficit spending (central government borrows money and spends it), quantitative easing (central bank buys long term private debt, increasing the money supply for short term spend…

The irony of this approach is that the lower interest rates are, the more people need to save to reach their retirement goals. If this effect is stronger than the incentive to borrow and invest, low interest rates might actually curb consumption.

Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate

#58

Post by otabdeveloper1 »

adrianN wrote: post #2

Can someone explain to me why both cheap oil and expensive oil seem to be bad for the economy? Back when oil was >$100 per barrel everybody seemed to blame the weak economy on expensive oil. Now somehow very cheap oil is also a bad thing.

Cheap oil is taken as a signal of deflation, and deflation is very bad because it happens when the economy is too broken to make investing worthwhile.

Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate

#59

Post by nabla9 »

neximo4 wrote: post #53
nabla9 wrote: post #41

Earlier quoted context omitted.

I think you are confusing exchange rate mechanism and domestic economics and their interactions. Deflation does not mean that exchange rate of Japanese yen increases relative to other currencies. Japan has free floating currency with inflation-targeting framework. Japan's import-export balance adjusts more or less automatically because the currency floats relative to other currencies. Japan has very little foreign de…

> Deflation does not mean that exchange rate of Japanese yen increases relative to other currencies. There is evidence that shows over the long run a currency's exchange rate will be favoured against those with a positive inflation rate differential.

Of course it does, but the effect is not linear and its mostly correlation caused by underlying mechanisms.

Too much inflation is usually sign of problems in the economy. Too low inflation is also sign of problems. The optimum rate of inflation is usually somewhere 1-4%.

Strong currency is not good thing in itself. It hurts exports and makes foreign goods cheaper.

Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate

#60

Post by fennecfoxen »

acd wrote: post #5

But it did not work in the 1990s for Japan, why would it work better a second time? The zero lower bound problem refers to a situation in which the short-term nominal interest rate is zero, or just above zero, causing a liquidity trap and limiting the capacity that the central bank has to stimulate economic growth" https://en.wikipedia.org/wiki/Zero_interest-rate_policy http://www.thedailybell.com/exclusive-interview…

I was reading the Wall Street Journal analysis recently, which agrees this won't help much, nothing that while it's designed to provoke investment "the gap between corporate cash flow and investment stands at a record 6% of GDP. If firms wanted to invest, they could go to their own vaults."

They recommend this measure only if combined with structural reform (especially labor reform), observing "Japan’s rigid labor system has led firms to refuse to hire more “regular” workers, whom they cannot lay off during slack times. Instead they hire “nonregulars”" and do not invest in training and human capital and doing little for these workers' futures. After that they suggest fiscal stimulus, but observing that past "fiscal stimulus" has been mostly handouts to inefficient farms in rural districts to buy votes they instead recommend measures like making public high schools free (!!) and getting sewage systems to the 40% of the population that doesn't have them (!!!).

http://www.wsj.com/articles/negative-rates-wont-save-japans-... (usual paywall dance applies)

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