An interesting, but misleading, viewpoint from the Beeb (excerpt):
Lesson from Japan: Do low interest rates boost growth? By Mariko Oi BBC News, Tokyo
…In part to help small companies such as Hosobuchi, central bankers in Japan have been keeping interest rates low, in order to reduce their borrowing costs.
The truth is we don't have enough businesses or the need for investments to borrow the money”
Japanese interest rates have been close to zero since the mid-90s, but it has not offered a miracle cure.
"Low interest rates make it easier to borrow money, so we appreciate it," says Mr Takahashi.
"But the truth is, we don't have enough businesses or the need for investments to borrow the money."
Hosobuchi is not alone in its reluctance to borrow.
"The size of corporate debt went from 147% of Japan's gross domestic product (GDP) in 1990 to 125% in 2000," according to Jesper Koll, Japan director of research at JP Morgan.
"By 2011, it had fallen to 99% of GDP."
…But despite such attractive rates, real estate agent Hidetaka Miyazaki says he has not seen an increase in the number of buyers and investors in the last 20 years, especially not in sub-urban areas…
…Borrowing in Japan did pick up during the 1990s, when Japan was cutting rates to fight the economic recession…
…Despite low interest rates, Japanese companies have not been borrowing money "If you look at statistics, household debt - that is mortgages, credit card debt and car loans - went from 66% of Japan's GDP in 1990 to 74% in 2000.
"But at the end of last year, it was back down to 66%... so the biggest beneficiary of low rates is the Ministry of Finance and governments.
"The public sector borrowing went from 59% of GDP in 1990 to 131% in 2000. At the end of last year it was 226%."…
…So what lessons can the world learn from Japan?
"Low rates do not boost private demand, private risk-taking or entrepreneurship," according to Mr Koll.
"But they allow for bigger and bigger government role in the economy.
"Clearspeak," he continues, "low rates encourage financial socialism and crowd out private risk takers and initiative."
These are the very qualities in businesses that US and other Western economies have been proud of, not least because consumer demand in those nations has provided a major engine for economic growth.
Since the financial crisis hit, however, central banks around the world have been lowering interest rates to boost their economies.
Though if the Japanese experience is anything to go by, they might be running the risk that low rates may end up doing more damage than good.
This article’s rather muddled, and there’s a whole bunch of stuff here that’s spun as an argument against low interest rates as a policy tool.
Unfortunately, it’s missing the forest for the trees.
First of all, there’s the idea that you can judge the policy stance from nominal interest rates. What actually matters is the real interest rate, which is the difference between the nominal rate and the rate of inflation, and not the difference between the nominal rate and zero. In a deflationary environment such as afflicts Japan, even a zero policy interest rate has a positive real value – in other words, policy is tighter than it looks.
As Milton Friedman said:
After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.
You can’t tell off the bat whether monetary policy is tight or loose on the basis of nominal interest rates alone.
To provide a counterexample, lets look at India – the policy rate is at 8.0%, which sounds high and looks like tight monetary policy. But consumer inflation just hit 10% in June (it’s been averaging between 8.0%-10.0% since 2010), so the real rate is actually around negative 2.0% – and that’s loose monetary policy by any standard.
Third and most crucially, the question that should have been asked is why there are few business and investment opportunities in the first place.
Easy answer – demographics. Check out these links for Japan’s population breakdown over the years:
Japan hit its population peak sometime in the past decade, but the peak for the working population was hit a little earlier.
In a growth accounting framework, three things boost growth – additional capital, additional labour, and total factor productivity. Returns on capital are subject to diminishing returns, so adding capital per worker beyond a certain point is actually counterproductive (falling TFP).
Since Japan is a highly developed nation with a massive stock of capital (infrastructure and the like), growth boils down to improving productivity and/or increasing the labour force. With the latter actually shrinking, TFP growth has to overcome both diminishing returns on capital and strongly negative labour force growth, for Japan to actually show headline GDP growth.
Given these conditions, it’s a testament to the productivity of the Japanese and their companies that Japan is showing any growth at all.
Last point: Whatever Mr Koll is, he’s not an economist. Crowding out of private spending and investment by the public sector are associated with high interest rates, and not low. In Japan’s case, high public debt and expenditure are occurring not at the expense of private consumption and investment, but in the latter’s absence.
That Japan’s government has gotten away with substantial budget deficits and monetisation of public debt without a market interest rate response suggests something else is going on – corporate and household deleveraging is offsetting public debt accumulation and vice-versa.
Think about what would happen if Japan decided on fiscal consolidation – the supply of JGB’s would fall, leading to even lower yields on government debt, not higher. Government expenditure would fall, but since the domestic consumer market is effectively shrinking, there would be no reason for businesses to spend or invest any more than they have done.
All the clues are in the article, it’s just a matter of putting it together.
One final thought though: if my interpretation is correct, Japan’s efforts at reflating their economy might be misguided. If potential growth, due to a shrinking population and lower investment needs, is low or even negative, there’s simply no point in fiscal pump-priming. What we really need are better growth metrics, as GDP and even GDP per capita on their own do not capture changes in demographic makeup.
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