Blog Can negative rates drive positive growth?

Can negative rates drive positive growth?
Headwinds trigger Japan’s historic move to negative interest rates

Three years into a determined government effort to boost economic growth, Japan’s GDP managed to decline in the final months of 2015. Monetary easing, fiscal stimulus and deregulation – Prime Minister Shinzo Abe’s three arrows – have not fully overcome the downward economic pressure of an aging population and a slowdown in neighboring China.

Against this backdrop, the Bank of Japan in January lowered a key interest rate to below zero for the first time in history, thereby charging commercial lenders that deposit funds at the central bank. Even though that rate cut rocked the yen and Japanese stocks, BoJ Governor Haruhiko Kuroda recently told parliament the rate could go as low as negative 0.5 percent.    

Working alongside Abe trying to right the economy is Tomomi Inada, who chairs the Policy Research Council of the Liberal Democratic Party and serves as Minister in charge of Administrative Reform and Regulatory Reform.

Considered a skillful politician, known for consensus building and working with opponents to get results, Inada is seen as a potential successor to Abe, which would make her the first female prime minister in Japan’s history. Reportedly known as the LDP’s Joan of Arc to Abe, Inada will discuss Japan’s economy in a keynote presentation at Credit Suisse’s Asian Investment Conference on April 8, 2016.

The current economic headwinds raise doubts that the Abe government will stick with its plan to raise a consumption tax to 10 percent from 8 percent in April 2017. Along with other economic advisors, Inada may have been laying the groundwork for a policy reversal with her recent comment to Japanese media "There is no need to raise the tax at the expense of economic ruin."

Inada is known as a fiscal conservative, with a penchant for reducing government spending and budget deficits. Some analysts say she drew inspiration for spending curbs from studying previous efforts by Germany and others in Europe. Still, in the near-term, stimulus could take precedence over fiscal prudence.

It’s an open question whether such stimulus will succeed. The Organization for Economic Cooperation and Development’s (OECD) March leading indicators report projects a continuing slowdown in Japan, and the OECD area as a whole. Meanwhile, the Bank for International Settlements warned that easy money policies, including negative interest rates, may be losing their potency, writing in a recent report: "Despite exceptionally easy monetary conditions, in key jurisdictions growth has been disappointing and inflation has remained stubbornly low".