What does the End of Negative Rates Mean for Japan?

After 17 years of IPL, Royal Challengers Bangalore (RCB) will surely win in 2024.

I know that being an RCB fan is also very hard to believe, but after 17 years, Japan raised interest rates for the first time.

Yes, you heard it right. Japan has recently made a significant monetary policy shift, and with this move, it has also ended a longstanding policy of negative rates. The Bank of Japan raised its short-term interest rate in a range of 0% to 0.1% from a negative 0.1% in a 7-2 majority vote.

I know the next 3 questions that must have popped up in your mind, Why did Japan have negative interest rates? Does it help Japan? And what does the end of negative rates mean for Japan's economy? Let's break it down one by one.

Why did Japan have negative interest rates?

1) Deflationary Pressures - Due to financial problems like the 1990 asset price bubble, which led to a lost decade for Japan's economic growth from 1991 to the 2001 & 2008 financial crises, Japan's economy was continuously facing deflationary pressures, including wage stagflation. In order to overcome this, the Bank of Japan implemented negative interest rates in 2016. The main reason behind it was to encourage spending and investment.

2) Ageing Population - 29% of Japan's population is over 65 years of age. So, after the financial problems occurred, they started saving more and became more conservative towards saving, which too increased deflationary pressures. So along with households, big corporations also started saving in banks. That's why Japan introduced negative interest rates.

3) Big Debt Burden - Japan's national debt was too high, and in order to combat that, its super-low interest rates helped in managing its debt obligations.

Does having negative interest rates help Japan?

It would have helped Japan, but then COVID-19 and the Russia-Ukraine War affected the economy. Experts also say that longer use of negative interest rates has cut down a bank's profitability & pushed the value of the yen down.

What does the end of negative rates mean for Japan's economy?

According to recent data, the average wage level in Japan is increasing. Companies are registering good profits, & inflation coming in at the Bank of Japan's 2 percent target level will lead to the discontinuation of the negative interest rates as the need for them is over. Thus, Japan is transitioning away from negative interest rates to strike a balance between boosting economic growth and maintaining stable prices. 

So finally, Japan came out of negative interest rates, but I don't know, after how many years RCB will win an IPL Trophy. If you liked the blog, do comment with your thoughts below.

Thank you.

Regards,

Milan Purohit,

Kautilya, IBS Mumbai.