Haruhiko Kuroda says “it will gradually become clear” that negative interest rates can save the world. I just hope the Bank of Japan head means sometime in the next eight years.
At the eight-month mark, Japan’s embrace of the sub-zero world is failing even more spectacularly than in the eurozone, Denmark, Sweden and Switzerland. And it hasn’t taken long to prove it, as savings rates for most countries running negative-rate policies swell to the highest level in at least 20 years. Kuroda’s answer is the same as European Central Bank head Mario Draghi’s: be patient. A better one would be to admit defeat, scrap this negative-interest-rate-policy silliness and treat the real problem.
What’s that? Psychologically battered consumers from Paris to Tokyo to New York smelling the panic in central bankers’ actions.
With their winks, nods, secret handshakes and esoteric jargon, central banks have long been contemptuous of the consumers their monetary voodoo aims to control. They may not understand what we do with our policy levers, arrogant catchphrases and nebulous communiques, central banks figure, but they’ll snap to and buy more — or less, depending on our wishes. Households won’t know what hit them.
Until they actually do, as in the case of the BOJ’s January move to follow the ECB down the NIRP rabbit hole. NIRP aims to force timid bankers to lend more of the BOJ’s cash, while offering businesses and households borrowing opportunities they can’t refuse. Yet the moment Kuroda announced the policy, consumers realized the BOJ was really screaming panic. As they scrambled to boost savings, households didn’t just call Kuroda’s bluff — they betrayed a better understanding of where the global economy is than his army of Ph.D.s and libraries of monetary theories.
Turns out, living through 26 years in and out of recession, at least as many giant fiscal stimulus and untold monetary easings morphed tens of millions into amateur economists. Funnily enough, it was my Tokyo hairdresser who first told me in January why NIRP would backfire: Japan’s deflation-era-traumatized bankers would rather make less money than risk making bad loans. My next-door neighbor knew before Kuroda that consumers would rebel, just as my local reggae bar owner sensed NIRP would drive fellow small business owners to invest less and reduce the wages they pay employees. Nor does it take a Harvard MBA to worry Toyota and other Japan Inc. icons suddenly have more incentives to move jobs abroad.
NIRP is getting no more traction in Germany or Switzerland than the Federal Reserve’s quantitative-easing moves in the United States. Rather than admit defeat, economists buzz about the ECB, BOJ and others crazily pushing further into negative territory. We can debate why central banks would double down on failure — to bail out tired politicians, a lack of imagination, a faulty understanding of global conditions — but it’s sending a message of desperation.
The key is prodding those politicians to use fiscal spending and structural upgrades to stimulate demand. It’s also looking at what’s not working and recalibrate monetary policy accordingly. One suggestion: stop insulting the public’s intelligence with assurances NIRP is helping, gradually or otherwise. The more monetary officials try to fool the public, the more they lose credibility. Another: stop targeting inflation and focus on wages, consumer demand or some other objective that won’t backfire.
That’s the cautionary tale from Tokyo these last 40 months. In March 2013, Kuroda supersized Japan’s quantitative easing with an audacious reach for 2 percent inflation. Other than the odd Nikkei rally and a weaker yen, Asia’s No. 2 economy has nothing to show for it. As it turns out, constant talk of 2 percent inflation just around the corner scared households. They saved more, deepening the “deflationary mindset” Kuroda promised to defeat. In retrospect, the BOJ should have gone with a 2 percent gross domestic product mantra.
It also should have thought through how the businesses and consumers it hoped to enliven would respond to negative rates.
Japan’s deflation, after all, is more about the aging population and rigid corporate culture that refuses to adapt than stingy central bankers. Rather than rise to China’s challenge and innovate its way to greater competitiveness, Tokyo is resigning itself to a mediocre future. By taking the onus off today’s politicians to make hard decisions, central banks are consigning nations to subpar growth tomorrow.
Not all monetary powers are going the NIRP route. Bank of England Gov. Mark Carney is “not a fan” of policies that undermine savers and the solvency of the banking sector. The unintended psychological consequences to which Carney alludes deserve far more attention. If households en masse worry about their rainy day funds, as they increasingly do, they’ll save more and spend less. Thing is, who cares about cheap loans if you don’t believe your financial standing will improve anytime soon. As Yves Mersch, a member of the ECB’s executive board, sees it, “households are hoarding even more” cash for just that reason.
In the eurozone, it’s worth noting, interest payments on savings accounts are the lowest since 2000. That negative rates are now slamming pension payments ensures consumers will respond by spending even less. Brexit-related turmoil is only accelerating the decline in demand.
Some argue NIRP needs to go even further into uncharted territory. The problem, they say, is central banks aren’t communicating the program well enough. They’re doing a bang-up job showing the folly of thinking negative rates will boost confidence. It’s gradually become clear that far from saving the world, negative rates are giving it away.
William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics. www.barronsasia.com
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