.
In the closing days of January, the Bank of Japan (BoJ) moved to cut interest rates below the zero bound at -0.1 percent, joining a select group of European central banks also experimenting with negative interest rates (these include the European Central Bank, Swiss National Bank, and Danmarks Nationalbanken). Now, rather than receive interest payments, the BoJ's depositors must essentially pay to park their money at the central bank. The move is meant to further incentivize banks to channel their excess money into the real economy and thus boost inflation towards the goal of two percent—or so the thinking goes.
Just yesterday, the BoJ added the power of words to its new negative interest rate policy. Governor of the BoJ, Haruhiko Kuroda, stated that there would be “no limit” to monetary easing, indicating that the BoJ would not rule out further cuts in the interest rate. Kuroda's recent remarks are a complete 180 from his position only a few days earlier where he explicitly told parliament cutting interest rates would not be considered.
But despite the element of surprise, Kuroda's policy shift is emblematic of two important themes.
First, is that in a post-global-financial-crisis world, quantitative easing and low interest rates embody the “new normal”. From Washington, D.C. to London to Frankfurt to Tokyo, interest rates have either approached or dipped under the zero bound, while at the same time central banks have engaged in varied and often politically contentious ways of increasing the money supply of their respective economies—all in the hopes of resuscitating growth. Simply put, unconventional monetary policy is becoming the rule and not the exception for today's central banks.
As this “new normal” ossifies itself in the psyche of central bankers, it also implies a “new radical” where monetary policies are able transcend limits that were nearly inconceivable only a decade earlier. Negative interest rate policy—or NIRP—is an example in motion of increasingly unconventional monetary policies taking hold.
Given the proliferation of unconventional monetary policies, their effects are obviously an important point of focus. There are certainly the more technical concerns of how negative interest rates may affect the economy, whether beneficially or adversely (see here). However, just as momentous is the potential signaling effect of unconventional monetary policies—NIRP included.
The BoJ's move to a negative interest rate policy can potentially signal two things—one good and one not-so-good:
(1) The good: We, the BoJ, are committed to combating deflation and remain fully committed to hitting our inflation target of two percent. Engaging in a negative interest rate policy is reflective of this steadfast commitment and should encourage expectations for a higher future inflation rate.
(2) The not-so-good: We, the BoJ, are officially out of options and are now going “all in”. A negative interest rate policy is merely a desperate attempt to lift inflation and stimulate spending. The more conventional tools of monetary policy have been rendered ineffective. So if this doesn't work, nothing will.
Obviously, the BoJ hopes the former is how markets interpret the recent policy move. But the dilemma faced by the BoJ constitutes the second theme—that while increasingly unconventional monetary policies may inspire confidence within the market, they also risk signaling the impotency of a central bank. For instance, central banks may be willing to demonstrate their resolve by exploring new forms of monetary policy, but doesn't this “resolve” stem from a loss of control over the economy? In this way, financial institutions may read policy changes as a sign of panic, banks thus pull back lending, and economic contraction becomes a self-fulfilling prophecy.
Kuroda's declaration of there being “no limits” to monetary easing is clearly an effort to nudge the market into interpreting negative interest rates in the more positive light. The effort is reminiscent of Mario Draghi's “whatever it takes” speech to preserve the Euro, which preceded the ECB's politically and legally controversial Outright Monetary Transactions (OMT) program to buy up the bonds of distressed Eurozone member states. In fact, Draghi's words worked quite effectively at the time in restoring confidence in the Euro. Talk may indeed be cheap, but not when it comes from a central bank governor.
Only time will tell if Kuroda's attempt at assurance is as persuasive as Draghi's quest to save the Eurozone. But the BoJ is surely finding out now that although unconventional policies have become the new normal, these policies are starting to walk a fine line between boldness and desperation, between confidence-building and self-defeating, between ingenuity and recklessness. Economic lethargy will only reinforce the need to walk this line: the longer the economy stalls, the greater the demand for radical monetary policy; and the more radical monetary policies become, the greater the risk that markets view these policy moves as signs of desperation. It is a chilling assertion.
About the author: Brendan Connell is an SIS graduate of American University and prospective PhD student in Political Science. His research is in international political economy, mainly the politics of trade and global finance. Previously, he has blogged on international trade issues for the American Security Project and studied at the Graduate Institute in Geneva, Switzerland.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
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Japan's Monetary Easing Illustrates the Fine Line between Boldness and Desperation
Close up Japanese Yen banknotes on white background.
February 9, 2016
In the closing days of January, the Bank of Japan (BoJ) moved to cut interest rates below the zero bound at -0.1 percent, joining a select group of European central banks also experimenting with negative interest rates (these include the European Central Bank, Swiss National Bank, and Danmarks Nationalbanken). Now, rather than receive interest payments, the BoJ's depositors must essentially pay to park their money at the central bank. The move is meant to further incentivize banks to channel their excess money into the real economy and thus boost inflation towards the goal of two percent—or so the thinking goes.
Just yesterday, the BoJ added the power of words to its new negative interest rate policy. Governor of the BoJ, Haruhiko Kuroda, stated that there would be “no limit” to monetary easing, indicating that the BoJ would not rule out further cuts in the interest rate. Kuroda's recent remarks are a complete 180 from his position only a few days earlier where he explicitly told parliament cutting interest rates would not be considered.
But despite the element of surprise, Kuroda's policy shift is emblematic of two important themes.
First, is that in a post-global-financial-crisis world, quantitative easing and low interest rates embody the “new normal”. From Washington, D.C. to London to Frankfurt to Tokyo, interest rates have either approached or dipped under the zero bound, while at the same time central banks have engaged in varied and often politically contentious ways of increasing the money supply of their respective economies—all in the hopes of resuscitating growth. Simply put, unconventional monetary policy is becoming the rule and not the exception for today's central banks.
As this “new normal” ossifies itself in the psyche of central bankers, it also implies a “new radical” where monetary policies are able transcend limits that were nearly inconceivable only a decade earlier. Negative interest rate policy—or NIRP—is an example in motion of increasingly unconventional monetary policies taking hold.
Given the proliferation of unconventional monetary policies, their effects are obviously an important point of focus. There are certainly the more technical concerns of how negative interest rates may affect the economy, whether beneficially or adversely (see here). However, just as momentous is the potential signaling effect of unconventional monetary policies—NIRP included.
The BoJ's move to a negative interest rate policy can potentially signal two things—one good and one not-so-good:
(1) The good: We, the BoJ, are committed to combating deflation and remain fully committed to hitting our inflation target of two percent. Engaging in a negative interest rate policy is reflective of this steadfast commitment and should encourage expectations for a higher future inflation rate.
(2) The not-so-good: We, the BoJ, are officially out of options and are now going “all in”. A negative interest rate policy is merely a desperate attempt to lift inflation and stimulate spending. The more conventional tools of monetary policy have been rendered ineffective. So if this doesn't work, nothing will.
Obviously, the BoJ hopes the former is how markets interpret the recent policy move. But the dilemma faced by the BoJ constitutes the second theme—that while increasingly unconventional monetary policies may inspire confidence within the market, they also risk signaling the impotency of a central bank. For instance, central banks may be willing to demonstrate their resolve by exploring new forms of monetary policy, but doesn't this “resolve” stem from a loss of control over the economy? In this way, financial institutions may read policy changes as a sign of panic, banks thus pull back lending, and economic contraction becomes a self-fulfilling prophecy.
Kuroda's declaration of there being “no limits” to monetary easing is clearly an effort to nudge the market into interpreting negative interest rates in the more positive light. The effort is reminiscent of Mario Draghi's “whatever it takes” speech to preserve the Euro, which preceded the ECB's politically and legally controversial Outright Monetary Transactions (OMT) program to buy up the bonds of distressed Eurozone member states. In fact, Draghi's words worked quite effectively at the time in restoring confidence in the Euro. Talk may indeed be cheap, but not when it comes from a central bank governor.
Only time will tell if Kuroda's attempt at assurance is as persuasive as Draghi's quest to save the Eurozone. But the BoJ is surely finding out now that although unconventional policies have become the new normal, these policies are starting to walk a fine line between boldness and desperation, between confidence-building and self-defeating, between ingenuity and recklessness. Economic lethargy will only reinforce the need to walk this line: the longer the economy stalls, the greater the demand for radical monetary policy; and the more radical monetary policies become, the greater the risk that markets view these policy moves as signs of desperation. It is a chilling assertion.
About the author: Brendan Connell is an SIS graduate of American University and prospective PhD student in Political Science. His research is in international political economy, mainly the politics of trade and global finance. Previously, he has blogged on international trade issues for the American Security Project and studied at the Graduate Institute in Geneva, Switzerland.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.
