Japan is no longer the only country with negative interest rates and has ended a unique “monetary experiment” in the world

Controlling inflation has been a passion of governments around the world for at least the last two years.

But this time there has been one exception: Japan.

While central banks around the world raised their interest rates to prevent rising inflation and its impact on people’s purchasing power and living conditions, the Bank of Japan kept them negative in a quest to achieve exactly the opposite: that prices would rise. .

For this reason, Japan has been the only country in the world to suffer from inflation with negative interest rates; That means below zero.

Until this Tuesday.

That day, the Bank of Japan announced an increase in official interest rates, from -0.1% to between 0 and 0.1%, a minimal change but meaning crossing the threshold for negative rates.

The Japanese exception, which is now ending, was due to efforts by the authorities to stimulate its economy, There were several years of pressure in the context of low growth, which was reflected in persistently falling prices, among other indicators.

This is what the consensus among economists says In a healthy economy, prices should not fall but should rise moderately., The world’s major central banks aim to keep it at around 2%.

But keeping prices from falling has long been an elusive goal for those responsible for the Japanese economy.

Ken Kuttner, speaking with BBC Mundo, explains, “Japan was one of the few that tried negative interest rates; others that resorted to it, such as the Bank of England or the European Central Bank, did them long ago. Had just left it.” Expert in Japanese economy from the University of Massachusetts in the United States.

The Bank of Japan’s abandonment of its “ultra-loose” policy, which had negative rates as one of its most relevant instruments, It represents a before-and-after for the world’s third-largest economy, which is now entering a new landscape.

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What are negative interest rates?

The establishment of negative interest rates is considered an unconventional and radical measure which implies that, instead of receiving interest on funds deposited in banks, the most common, Depositors have to pay interest for keeping those funds.,

Its objective is to encourage money to move by promoting investment and consumption while hurting savings.

Although in practice it did not apply to the savings of ordinary Japanese, it did affect banks and other financial institutions, which were penalized if they did not raise their funds through loans, investments and spending.

Why are negative interest rates being abandoned now?

Global inflation has been rising steadily in recent years, fueled by the injection of public funds with which governments tried to keep households and businesses afloat during the Covid-19 pandemic and supply chain problems that have destabilized key commodities such as oil and grains. Goods increased. Since the beginning of the war between Russia and Ukraine in 2022.

Although the impact has been felt more slowly and gently in Japan due to the characteristics of its economy, the Central Bank had been signaling for some time that interest rates were about to rise.

Its governor, Kazuo Ueda, stressed the need to achieve a “virtuous cycle” in which wage growth is accompanied by price growth.

After a long period of deflation, prices have been rising above the ideal target of 2% for more than a yearThat has encouraged Japanese companies to accept about 5% wage increases in collective agreements for this year.

Along the same lines, GDP growth forecasts have been revised upward and a recent report from the International Monetary Fund indicated that inflation in Japan is now driven by increased demand, especially for such consumers. Is encouraging. Japanese people are traditionally reluctant to spend.

All this led Bank of Japan officials to believe that Ueda’s “virtuous circle” “became more solid” and they resolved to eventually cross the threshold of zero interest rates.

This decision and the moment it was adopted reveal the peculiarities of the Japanese economy.

While monetary authorities in almost the rest of the world have decided to aggressively put the brakes on the economy and raise rates consistently in recent years, in Japan they have at least now decided to take their foot off the accelerator.

According to Kuttner, “Japan took longer than other industrialized countries to end expansionist policies after the pandemicpartly because “The Bank of Japan had already tried to tighten its extremely loose monetary policy in the early 2000s and 2006, and both times it proved to be a mistake that it had to immediately correct.”

“I suspect this time they wanted to be completely sure before raising rates,” says the expert.

Why were negative interest rates adopted?

It was the worldwide Great Recession in 2008 that made those responsible for economic policy around the world begin to consider unusual and extreme measures such as setting negative interest rates.

so It was thought that encouraging the movement of money and investment would promote the growth of developed economies.Which had entered the phase of contraction and stagnation.

Thus, the European Central Bank, which controls the euro, the Bank of England, Sweden and a few others have set rates below zero, which is difficult to imagine before the crisis.

In Japan it was not until 2016 that rates entered negative territory, but the reasons for its weak or non-existent GDP growth and its persistent and damaging deflation were evident even before the crisis.

The country lost much of its dynamism when there was massive industrial and technological development after World War II.

It began to suffer a kind of decline from the 1990s. economic anemia Experts have attributed this to various factors.

With a greatly aging population more concerned with saving than consumption, Japanese companies were forced to compete amid continually falling prices, reducing their ability to make profits and consequently invest.

This was the trend until 2013, when the then Prime Minister, Abe Shinzo, launched an ambitious program to revive the economy and the Central Bank began launching a “bazooka of stimulus”, the most notable of which were rate cuts and purchases. Bonds issued by the government.

What were the consequences of negative interest rates in Japan?

Economists give contradictory global assessments of negative interest rates,

A review of published academic articles on the subject does not yield any definitive conclusions, not even in the case of Japan, where they have been in place for a longer time than elsewhere in the world.

Most experts agree that they were not sufficient in themselves to enhance economic growth, which was the primary objective when they were established.

The obvious effect was the loss in the value of the yen, the Japanese currency, which allowed the country to make its exports cheaper and increase its competitiveness, and a reduction in the state’s financing costs, which paid less interest on issued debt. ,

But, in the same way, Weak yen negatively impacts purchasing power of Japanese households and companies,

What impact will abandoning negative rates have in Japan?

Whenever rates rise in an economy there are winners and losers.

In Japan, the government will face higher costs to service its debt, while those paying mortgages will see an increase in loan interest.

And while banks will gain more profits from the loans they make, it will be more expensive for companies and households to access them.

In any case, that’s what most analysts and the market’s moderate reaction to the rate hike announcement suggests It will not have any harsh or exaggerated effect In the economy.

It should not be forgotten that, although rates are no longer negative, they remain at zero or very close to zero, nor that The Bank of Japan has shown that it will continue its policy conducive to economic growth,

No one believes that the Bank of Japan is going to pursue a sustained path of raising rates, as the US Federal Reserve has maintained to control prices and the economy’s overheating.

This is due to concerns about a possible recurrence of the Japanese economy’s most endemic problems: deflation and lack of growth.

As Kuttner points out, “It appears that the years of deflation are behind us, but we cannot forget that there were many years of it,” a conclusion that those responsible for the Bank of Japan appear to share. Are.

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