We most often think about inflation and its first cousin, interest rate, as a pair of high-pitched teenagers on eternal spring break who could really use a hug and a good night’s sleep to calm a bit down. No? That’s just me?
But in some other places in the world, the duo is more of the lackluster recluse type with a serious vitamin-D deficiency and an aunt, who always says: ”That new barista looks nice, why don’t you ask them out?”
However, last week, Auntie Eager (AKA Bank of Japan) got tired of trying and gave up on its more than a decade-long experiment with negative rates as a means to perk the economy up.
The thinking behind lowering rates into red is not that different from the thinking behind lowering rates in general: when funding costs less and deposits don’t pay extra, people will spend and invest more.The negative rate twist just put a top spin on that. Borrowers got paid to borrow and depositors got slapped on the wrist.
So, when economies looked especially bleh after the Global Financial Crisis (GFC) in 2008 the central banks in Europe—led by Denmark in 2012—and Japan from 2016 began pulling the rate lever further back that it had ever gone before.
Did it work? Hmm, hard to say. The consensus seems to be that at best it didn’t make things worse. Some say that Japan’s only slightly negative rate regime (-0.1%) was not negative enough to change behavior, others that because it is really difficult to get depositors to pay rent on their savings, instead of just pulling them out, it wasn’t great for the banks’ net interest income (NII).
And it spurred some curiosities. When first introduced in Japan, people vacuumed the market for safes and really big mattresses.
Also, it turns out that the general public tend to perceive words such as minus and negative as, well, negative, so there might be some lessons learned with regards to marketing.
As an explicit monetary policy tool, however, the negative rates paved the way for a massive carry trade to the tune of $4.1tn where Japanese investors could borrow at home at guaranteed zero cost and eat out on, say, US treasury bonds that yield 4% or more. With that kind of outstanding, the policy must be unwound slowly with soft gloves and a lot of running commentary to not cause uncontrollable ripples across the globe.
So how is that working out? Hmm, again.While interest rates were only moved the tiniest nudge from a target range of (-0.1-0%)to a target range of (0-0.1%), it came with no indication of further rate increases, and the BoJ has said it will keep it mellow.
As of writing time, that has caused JPY to weaken to a record-low level against USD (close to 152) and thus widened the gap between the yields even more. And a speculative bubble is exactly the kind of bubble that raises blood pressures, fear indices, and nail-biting speeds alike.
Volatility is no good at making friends because it can change asset values faster than traders can click their mouse (which is kind of the definition of volatility.) In other words, more of a toddler with a hammer and an airhorn after having been left unsupervised with a box of sugar-glazed donuts.
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.