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(Bloomberg) — The Bank of Japan is widely expected to abandon the world’s last negative interest rate in the coming weeks, marking the final act of the grand experiment of global central banks with unorthodox policies.
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Governor Kazuo Ueda is expected to raise short-term rates to -0. 1% next week or in April, which would be Japan’s first rate hike since 2007, according to economists and bond traders.
The move would mark a step toward conventional policy after decades of experimentation in which the BoJ amassed a mountain of bonds and stocks, inflating its balance sheet to 127% of its annual output. Even though all this quantitative easing and negative interest rates helped weaken to protect the yen and prevent deeper deflation, it took the crises caused by Covid-19 and the Russian war in Ukraine for inflation to rise above 2% and stay there.
For the world, this will mean the end of the era of negative rates, a radical policy strategy also pursued by the European Central Bank and some of its continental peers in their fight against falling costs in the 2010s. If the downtrend is pricing in the stress it caused on banks and fixed income investors, economists are also giving mixed verdicts in the case of Japan.
“The negative rate has done nothing, nothing at all” to fuel inflation, said Kazuo Momma, former executive director of financial policy rates at the Bank of Japan. “Inflation in Japan has been fueled by price pressures coming from abroad. “
Starting with Denmark, negative rates have been installed in Switzerland, Sweden and the eurozone for a number of reasons ranging from curbing massive capital inflows into the Swiss franc to selling higher costs in the wake of the sovereign debt crisis in the case of the ECB.
After more than a decade of deflation, the Bank of Japan turned negative in 2016, just days after then-Governor Haruhiko Kuroda publicly denied the move.
“It had a huge impact,” said Hiroshi Yoshikawa, a former adviser to the minister’s top economic committee and professor emeritus of economics at the University of Tokyo. “People were shocked and learned how bad the Japanese economy was. “
At the time, Kuroda said the negative rate could simply be reduced if necessary. But after public backlash, opposition from banks that saw their margins squeezed and pension and insurance administrators who had to invest to locate assets with sufficient returns, the rate has changed. It never sank deeper into the red. Six months after a rocky start, the central bank announced a review of its policy as it struggled to find a way to control bond yields while keeping the rate negative.
The global experiment of sub-zero rates also continued. The inventory of bonds on which investors earned negative returns eventually peaked at $18. 4 trillion at the end of 2020, according to Bloomberg’s Global Aggregate Index. Then, inflation stirred and European central banks blew up. negative territory, with the SNB’s resolution in September 2022 leaving the BOJ as the last to have sub-zero rates.
The verdict on the program’s effectiveness is mixed.
The ECB has claimed that negative rates are a success, and according to studies they seem to help bank lending, the transmission of political impulses in the monetary system, stimulate the economy and increase inflation.
In Switzerland, central bank President Thomas Jordan went further, saying last year that the policy had “proven its worth” and would be reimplemented if necessary. On the other hand, the Swedish Riksbank abandoned this policy at the end of 2019, believing that the impact on its monetary formula was excessive.
The Federal Reserve never turned negative, hitting a low of between 0% and 0. 25% in March 2020 as the Covid pandemic raged. While they would possibly be useful in the short term, negative rates can be “counterproductive if implemented in the long term. “horizon,” the researchers wrote in a paper published in September.
“The most important thing we’ve learned about negative interest rates is that they’re incredibly limited,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington, who in the past worked at the Federal Reserve.
Analysts at the Federal Reserve have pointed out that negative rates can weaken the currency, a goal that the SNB and the National Bank of Denmark are targeting.
Over the past two years, as U. S. interest rates rose, the yen fell to its lowest point in three decades. This has weighed on families and small businesses as import prices have risen, but it has also helped boost overall profits for Japanese corporations. at a record level.
Rising earnings helped propel the Nikkei 225 stock index to a new record this year for the first time since 1989. Banks have bet that abandoning negative rates would improve margins as some of the biggest lenders prepare to take off.
Read more: Japan’s largest bank prepares for BOJ hike this month
But one key player will be keen to keep loan prices low: Prime Minister Fumio Kishida has promised to increase spending on childcare and national defense and will rely on reasonable debt to pay this off. Japan has the largest public debt in the relative evolved world. to its gross domestic product, by 255%.
Ueda is still keeping his duties open, and wage negotiations will culminate this month, key to confirming whether the economy is in what he calls a virtuous circle. Members of its board of trustees have signaled that a recovery is imminent.
But even though Japan’s days of negative rates are obviously numbered, economists expect loan prices to stay near 0 for some time.
—With those of Jana Randow, Enda Curran, Craig Stirling and Yasufumi Saito.
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