Japan's Negative Interest Rates: A Puzzling Phenomenon

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Apurva Dhamankar

10/4/20232 min read

Japan is a top 10 world power, ranked 6th for global competitiveness among 140 countries in 2019, according to the World Economic Forum's Global Competitiveness Report. It is also the 3rd largest economy in the world and the largest creditor nation with an annual trade surplus and considerable net international investment surplus. As of 2020, Japan has the third-largest financial assets in the world, valued at $12 trillion, accounting for 8.6% of the global GDP.

But why did the Bank of Japan (BOJ) introduce a negative interest rate policy as part of its Quantitative and Qualitative Monetary Easing (QQE) program in January 2016 it is negative till date.

As there are many reasons why the Bank of Japan introduced the Negative Interest Rate let's understand a few of them.

  1. One of the reasons why Japan introduced negative interest rates was to combat deflationary pressure. The struggle with deflation has led to reduced consumer spending due to anticipation of lower prices. Therefore, the Bank of Japan introduced negative interest rates to encourage spending and investment.

  2. The second reason was to encourage banks to lend money to businesses and consumers. With negative interest rates, it becomes expensive for banks to hold reserves, prompting them to lend money out instead. This leads to an increase in economic activity.

  3. Another reason was to combat currency depreciation. Negative interest rates can weaken the domestic currency, potentially making exports more competitive on the global market. This can eventually boost the country's export-oriented industries.

The concept of negative interest rates has been a topic of discussion in the financial world. Lower interest rates tend to increase the prices of assets such as stocks and real estate, which can create a sense of wealth among consumers. As a result, people may tend to spend more, which can boost the economy.

When interest rates are negative, borrowing becomes cheaper, which can incentivize businesses and individuals to take out loans for investment and consumption. This can stimulate economic growth as businesses can invest in new projects and individuals can spend money on goods and services. As a result, the economy may become more robust.

Thank you.

Regards,

Yash Vora,

Kautilya, IBS Mumbai.

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