Japan’s Negative Interest Rates

The Bank of Japan just recently introduced a small 0.1% handling fee for deposits, which is essentially a negative interest rate on all holdings.  Note that this is not a fee that applies to normal consumer accounts.  It only affects what commercial banks keep at the national bank.

Currently, interest rates for regular accounts are at unbelievably low levels.  So low that it hardly seems worth it to keep any money in the bank at all.  Sometimes they will advertise certificates of deposits (CDs) for enormous rates of something like 0.05% and that’s if you put away the equivalent of $10,000 in yen away (some require $30K or even $50K).

It’s surprising that people even save money anymore at those rates, because it seems like almost anything would be a better investment than locking up your money for a year or more and earning a handful of yen for your efforts.

So What are Negative Rates Suppose to Do?

Well, the theory behind negative rates is to inject more money into the economy.  The idea is that if it costs money to store money, banks and people will do something with that money instead of letting it sit around.  The government is hoping that banks will lower interest rates on commercial and house loans and money will flow out and inflate the economy.

If the rate gets to be too much of a burden on the commercial banks, they may take the drastic step of charging regular people to use their bank.  They could implement monthly fees for keeping a certain balance.  The theory goes that if consumers lose money if they keep their money in a bank, they will go out and spend that money on something.

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I personally use all of these on a daily basis and highly recommend them.

What Negative Interest Rates will probably Do

Pretty much nothing … to improve the economy at least.  That seems to be the general consensus of a lot of the major financial news sites and I agree.  Japan is missing a few components in order to make this have any real effect. (I’ll get back to those in sec.)

In fact, this move may have an opposite, detrimental effect.  In some places where negative interest rates have been introduced, it has actually increased the rates on mortgages and other loans.  Banks need to pay for those fees somehow, and it’s main source of income is loans.

Already, mortgages are available at such low rates that banks are hardly making any money on them.  When I got my mortgage, I qualified for much more than I actually asked for (and thought I could pay for).  And then, upon getting my loan, I was bombarded with offers for card loans, short-term high-interest loans, and other financial products they wanted to sell me.

After all, getting a mortgage from a bank creates a solid long-term relationship.  Granted this relationship is relatively easy and only slightly painful to get out of (about Y20,000 and some paperwork), but in general people tend to stick to their banks.  So banks are leveraging this relationship to make profit off other products.

Another problem with charging fees on savings, at least for charging fees on consumer accounts, is that people may just end up taking the money out of banks and stuffing it in their mattresses.  With the relatively low crime in Japan, picking up a nice safe and locking up your wad ‘o cash isn’t such a bad option.

Pensioners are especially not very eager to spend their savings, choosing to live meagerly on their pension from the government and keeping their nest egg for an emergency of some kind.

One of the biggest problems it causes, at least in my opinion, is that it is a sign to the world that Japan is in serious trouble and is making use of one of its last fiscal tools.  This ‘psychological’ damage might be the worst, scaring off investors and other big banks from investing in Japan.

It did weaken the yen momentarily, which is good for Japan’s export economy, but it was only for a moment.  The yen has been slowly drifting stronger this past year, and it seems like the trend was not interrupted.

The General Feeling

In general, this move has not been seen as a positive.  Some consumers are excited about the stock surge that happened shortly after the announcement.  However, overall, it seems most people in Japan are at best mixed about the decision.  If you are interested in some further reading, here is an excellent comparison of some editorials if you can read at a N2ish level.

The problem is that monetary policy has done everything it can for the economy.  Japan is awash with credit at the moment.  If you have a heart beat and something that resembles a regular job, you can get a loan; you can probably get a 120% loan (a loan for 120% of the purchase price), which is ridiculous.  There is no bank that would offer a regular Joe something like that in the States.

So banks are doing their best to pour money into the economy.  But not enough people want it.  The economy has been flat-lined for quite some time and sentiment will not improve unless there are some radical changes.

And their are plenty of options for that – empowering the female workforce, modernizing and industrializing farming, etc… Basically, all the other arrows of Abe’s three arrow plan that he hasn’t been implementing.

If Abe could take a break for a few months from his fairly unpopular pet project of reinterpreting the constitution, he might actually be able to pass through enough reforms to save the economy.  I’m not holding my breath though.