Negative interest rates in Japan

Somewhat unsurprisingly, Martin Sandbu (‘Free Lunch’ in FT) had cheered the move towards negative interest rates (difficult to explain in one sentence – see here) in Japan.  For good measure, he concluded with an exasperation that it took them so long time to get there, eliciting the following reaction from me:


Yes, we are all exasperated with different things for different reasons. Some of us are exasperated with commentary such as the above. When the consequences are factored in, we will be asking the question as to why they abandoned their last vestige of discretion, prudence and common-sense rather than asking the question of why it took them so long.

There are two iron-laws of public policy: one is the law of unintended consequences and the other is that the road to hell is paved with good intentions. It needs humility to accept them.

Negative interest rates might work as one could say about 0.0% interest rates if ‘other things are not equal’. Other things are not equal.

In theory interest rates = compensation for postponing consumption + inflation premium (for relative scarcity of goods over money, over time).

The first component is mostly a constant through time. Hence, if the LHS goes to negative, what is happening is that the second component of the RHS goes deeply into negative. In other words, the message goes out that there is no need for inflation premium and that there won’t be a relative scarcity of goods over money.

With that message, there is no reason nor incentive to invest. The opposite of what central banks say that they are trying to achieve!

Few days ago (January 25), you wrote about the Swedish central bank review and cited two ‘erudite’ policymakers in support of your piece – Lars Svensson and Bernanke. I think Krugman was missing from the honours list in this post.

A tweet by Steve Hanke in October contains a chart that gives a good picture of what Sweden’s monetary policy had achieved thanks to the misguided evangelicism of Lars Svensson blessed by Ben Bernanke, the high priest of the bible of ‘monetary policy über alles’ despite its failure to achieve anything useful to the economy and society.

It won’t, for the reason cited above. Other things are simply not equal. The policy has created asset bubbles, will continue to do so, will prevent bubbles from popping and hence further drive chasm between economic fundamentals and asset prices.

Your steadfast refusal to even acknowledge the possibility of the folly of your ways, theses and prescriptions is simply breathtaking.

Most FT journalists – barring a few – are doing a great disservice to public welfare by their advocacy and cheerleading of mindless policy interventions or policy interventions of the wrong kind.


Separately, I am not quite sure as to what BoJ policy would achieve. It just takes the currency war to the next level. A society of retirees and old people cannot do much with negative interest rates. Law of unintended consequences will operate. But, to reiterate, it is currency war by another name.


Mr. Kuroda, the Governor of the Bank of Japan advised China to adopt capital controls so that it could have domestic policy freedom. Perhaps, he had calculated that China would adopt capital controls and avoid depreciating the yuan, thus leaving the recent competitive gains of the yen intact. Alternatively, he might have calculated that China would do the opposite of what he proposed, thus inviting retaliation from the rest of the world. What is your guess?


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