If your New Years resolution was to stay “Positive,” look out: Japan has decided to go “Negative” in a big way. This week, the Bank of Japan decided to institute “negative interest rates” in an effort to boost the Japanese economy. If you’ve been scratching your head trying to understand what that means, you are not alone!
Europe has been trying out negative interest rates for a few years now - in Denmark, that means that, if you are paying a mortgage, the bank actually pays YOU interest on your money! Businesses pre-pay their taxes because the value of their money will drop over time and they will end up paying more if they don’t pay now. If you buy a bond, the bank charges you and you will get less money back than you put into the bank.
In theory, negative rates will push banks to lend more to companies, which would then spend and hire. It could even mean that individuals with bank accounts will see their accounts charged if they do not spend their money, forcing businesses and consumers both to spend money or suffer a loss. Japan has plenty of cash to spend: More than half of the $14 trillion in Japanese households’ financial assets are either bank deposits or cash, compared with only 13.7% for the United States and 34.4% for the euro zone.
The Bank of Japan will apply an interest rate of minus 0.1 percent to some current account deposits that commercial banks hold with it starting on Feb. 16. Banks in Japan are already cutting their interest rates. Sony Bank has already reduced the interest rate on ordinary deposits to 0.001 percent. Bank of Yokohama Ltd, one of Japan’s biggest regional lenders, cut its one-year rate to 0.02% from 0.025%, and Resona Bank, a unit of fourth-largest lender Resona Holdings, halved its rate to 0.025% on five-year deposits.
Not everyone is happy, however. Former all-star baseball player and controversial figure Jose Canseco went on twitter to express his outrage, at one point saying "Bank of Japan should call them willie wonka bonds "YOU GET NOTHING. yOU LOSE!”
Either way, for now, there is a silver lining for those of us living in the United States. By Friday evening, the yen was trading at 120.91 to the dollar, off 1.76 percent. The move spurred the U.S. stock market - the Dow industrials climbed nearly 400 points Friday.
The Japan Times
The New York Times
The Asahi Shinbun