Japanese Banks

Clark May II
Mr. Roddy
IHSS
January 28 2019
Japanese Interest Rates
Japan over the last few decades have dealt with high inflation rates and they have had some very interesting ways of dealing with it. One tactic, was lowering their interest rates to below 0%. This has been very effective for them. Their inflation rate is only 1.6%, well below their goal of 2%, so now they are looking to make their monetary policies more normalized. Recently, they changed the price ceiling of a 10 year government bond yield to 0.2% from 0.1%. While this does show signs of them change, the banks have stated that they will keep interest rates at a negative percent, or an extremely low rate. Even if it is raised out of the negative side, it still won’t make financial sense to invest in government bonds because the inflation will be higher then the yield so you will still be losing money.
Due to the many years of these low rates, numerous banks have not been profitable. With this problem getting worse, Japan has to find a way to make them more money which would lead to higher interest rates so they are stuck in a very difficult situation. The best way to get out of this would be if the economy grows at an extremely high rate and if inflation lowers a lot or even if it deflates. That scenario is unlikely though so it is unknown of exactly how they will fix the problem with minimal damage. The banks are not happy with the current situation and as of right now the negative interest rates have not been very successful.
Seeing how this has worked for Japan could have a big influence on how other countries utilize interest rates. There are many reasons for why you would drop your interest rates into the negatives. The main reason for this is that the government hopes that it would encourage banks to use their money more productively by giving loans to businesses. The main idea is that it will ultimately lower the cost of taking out loans, and making those cheaper makes them more enticing to people which will hopefully lead to more loans. More loans would mean more companies getting capital and they hope that the people receiving those loans would expand their businesses which would help grow the economy a lot. But the problem is that businesses aren’t finding profitable ways to use money so few people are taking on loans. Effectively, they have lowered interest rates but received almost no benefits from it.

Article: https://www.realclearmarkets.com/articles/2018/08/23/the_bank_of_japans_monetary_policy_seems_to_have_reached_its_limit_103397.html

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