The Effectiveness of Japan's Negative Interest Rate Policy

24 Pages Posted: 9 Aug 2017

See all articles by Naoyuki Yoshino

Naoyuki Yoshino

Asian Development Bank Institute

Farhad Taghizadeh Hesary

Waseda University

Hiroaki Miyamoto

University of Tokyo

Date Written: January 27, 2017

Abstract

In April 2013, the Bank of Japan (BOJ) introduced an inflation target of 2% with the aim of overcoming deflation and achieving sustainable economic growth. But due to lower international oil prices, it was unable to achieve this target and was forced to take further measures. Hence, in February 2016, the BOJ adopted a negative interest rate policy by massively increasing the money supply through purchasing long-term Japanese government bonds (JGB). The BOJ had previously purchased short-term government bonds mainly, a policy that flattened the yield curve of JGBs. On the one hand, banks reduced the numbers of government bonds because short-term bond yields had become negative, and even the interest rates of long-term government bonds up to 15 years became negative. On the other hand, bank loans to the corporate sector did not increase due to the Japanese economy’s vertical investment–saving (IS) curve. Firstly, we explain why the BOJ has to reduce its 2% inflation target in the present low oil price era. Secondly, we argue that Japan cannot make a sustainable recovery from its long-lasting recession and tackle its long-standing deflation problem by means of its current monetary policy and its negative interest rate policy in particular. It is of key importance to make the IS curve downward sloping rather than vertical. That means the rate of return on investment must be positive and companies must be willing to invest if interest rates are set too low. Japan’s long-term recession is due to structural problems that cannot be solved by its current monetary policy. The last section reports our simulation results of tackling Japan’s aging population by introducing a productivity-based wage rate and postponement of the retirement age, which will help the recovery of the Japanese economy.

Keywords: Negative Interest Rate Policy, Oil Price, Abenomics, Government Bonds, Inflation Target

JEL Classification: E43, E52, E12

Suggested Citation

Yoshino, Naoyuki and Taghizadeh Hesary, Farhad and Miyamoto, Hiroaki, The Effectiveness of Japan's Negative Interest Rate Policy (January 27, 2017). ADBI Working Paper 652. Available at SSRN: https://ssrn.com/abstract=3016104 or http://dx.doi.org/10.2139/ssrn.3016104

Naoyuki Yoshino (Contact Author)

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

Farhad Taghizadeh Hesary

Waseda University ( email )

1-6-1 Nishi-Waseda,
Shinjuku, Tokyo 169-8050
Japan

Hiroaki Miyamoto

University of Tokyo ( email )

Yayoi 1-1-1
Bunkyo-ku
Tokyo, Tokyo 113-8657
Japan

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