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When Bank of Japan played the role of precursor

by François Masquelier, Chairman of ATEL                                                       A

In February 1999, roughly 20 years ago, the Bank of Japan (i.e. BofJ) has adopted a zero percent rate policy. No one at that time thought that one day, Europe will follow them. The Japanese situation was at that time considered as unique, after the financial stock-exchange bubble blew up, banks faced problems and the economic context was in stagnation mode. Soon after, set up a “quantitative easing” policy (nothing new as you can see) in purchasing financial assets to supply banks with liquidities an to reduce or push down long-term rates. It even bought equities, could you imagine? BofJ tempted, several times, to come back to a “more normal” situation, without any success. But the global Financial Crisis (GFC) forced BofJ to reconsider its ambitions to come back to normal. Results of such a policy are mitigated. Growth and inflation stay weak. Two decades of floored rates impacted Japanese pensioners. These low rates have maintained alive some “zombie” companies. However according to economists, situation would have been worse in the absence of such radical measures. Nikkei was in the recent years a good performer which came from 15.000 points in 1999 to 20.900 in 20 years. We remain far from the 39.000 points (i.e. the record) reached in 1989.

The Japanese situation is scary for its longevity and the impression that interest rates will never return to “positive” territories. Yet the Japanese economy is not doing so badly. Like Switzerland and Scandinavian countries, this unusual situation could continue. Time no longer creates value in interest, on the contrary, it costs. We would certainly want to see rates go up not to pay more interest but because it would herald better economic conditions and the end of the recession period that never ceases to affect us.

Japan’s 20-year experience has demonstrated the limits of what a central bank can do on its own and underscores the importance of broader economic reforms as well as fiscal policies that dovetails with monetary strategies. The most pertinent lesson, if any, for the American Fed and European ECB could be the danger of reversing course too soon. As rightly expressed by Kenji Yumoto “monetary policy can buy time, but it doesn’t solve all problems”. Who ever thought Quantitative Easing and zero-rate policy would be inflationary? More than two decades after, we can notice a failure to reflate the economy. It has created a generation of consumers with little understanding or expectations of rising prices. It is much easier to introduce policy than to exit it. The anniversary of the Japanese zero rates ought to be an exercise in humility. 

Who could say what the monetary future holds for us? When will this atypical period end? Perhaps we will have to live this «japanification» of the economy for a long time… Nothing is more certain. The change of generation, the arrival of the “Z” generation and the crucial ecological (necessary) transformations, coupled with a digital revolution, will completely change the situation. We will have opportunities, but also huge challenges ahead. We will have new businesses emerging but also the disappearance of old ones. Sooner or later we will have a shortage of energy and mineral resources, so vital to our economy. The transformation that occupies us and will occupy us is such that it can bring even more chaos and difficulties to emerge. This can certainly open fantastic opportunities for redeploying our economies. It may be a long time ago when interest rates were necessarily positive (that goes without saying). At least, negative rates enable Governments to reduce debt or to cap interests to be paid. Could we in current context even accept positive rates? I guess it would be dramatic given the global increase (all-in) of States indebtedness.

In future, the main financial principles taught in Universities will have to be distilled differently to incoming students. Time is not anymore money…

Let’s hope that this anniversary, despite everything a little sad, will not be repeated too long. But let’s prepare to stay below zero for a while, I’m afraid.