Sunday, January 31, 2016

Japan introduced negative interest rate to boost economy. Japan’s central bank just set interest rates below zero for the first time ever, in an attempt to plug its leaking economy. 

It announced that it would charge a fee of 0.1 percent for certain categories of current accounts. Charging a fee for some accounts means you will be paying the central bank for keeping your money with it. 

Japan is not the first one to do such an endeavour...Europe has done something similar to this !


But what does a negative interest rate mean for a central bank of JAPAN in the first place?

Normal case me aisa hota hai !!

  • In a nutshell, central banks allow financial institutions to borrow money overnight from one another to make sure they have enough cash in reserve. 
  • A bank that has extra cash at the RBI (in India for example) can lend it to another bank that’s short of its cash reserve requirements and earn the RBI’s interest rate.
  • When these rates are high, banks are disincentivized from borrowing from each other. 
  • This chills the economy because less borrowing between banks means less money passed on to the borrowing public, and higher interest rates apply to whatever borrowing is taking place.
On the flip side, when interest rates are low, banks get interested in borrowing more, and the public, in turn, borrows more from the banks. This stimulates the economy.

Lekin JAPAN k case me kya hua?
  • However, this hasn’t worked well for Japan’s central bank. 
  • Low interest rates haven’t done much to help, nor has quantitative easing, which the Bank of Japan has done by buying up tons of bonds and other debt, pumping money into the economy. 
  • But the economy didn’t improve much.

toh,,,toh kya ,.,,waha k central bank Governor ne MENTOS  khaya !!
  • the bank pushed the rates below zero. 
  • Now, a financial institution that has a surplus of money in Japan’s central bank earns negative interest. 
  • In other words, the bank has to pay a fee to park its cash reserves there. 
  • In theory, this means it’s expensive for a bank to sit on its money. 
  • Therefore, banks are more likely to go out and lend that money to someone else—companies, most obviously. 
  • Putting that money into companies, and the general public, is supposed to reinvigorate the economy.
dimaag ki batti jali na !!

Impact on India?
  • Indian investors were seen hopeful of an interest rate cut by the Reserve Bank of India during the upcoming monetary policy review slated for February 2, which expectations were backed up by BoJ's decision to go in for a negative interest rate to support the Japanese economy.

Chalo Ab ANALYSIS karte hai IMPLICATIONs on world !!

  • First, it means that monetary policy is not working. There is something more fundamentally wrong with their economies, and trying to make money cheaper may not get growth rates up.
  • Second, in a world where central banks are trying to force banks to lend and people to save less, it is doubtful if the US Fed can go in the opposite direction. If Japan will give you money for nearly free, who will borrow in dollars in the US?
  • Third, we are probably close to another global recession. Japan, Europe and China are all slowing down, and US may be getting there. Clearly, the slack in the world cannot be fixed just by easy money.
  • Fourth, India will get no help from a reviving global economy, but cheap money can now flow into Indian stocks and debt, as Indian assets are looking cheaper. But this depends on how risk-averse global investors are. India’s growth will thus depend on what we do here, not what happens abroad. Ironically, even as our central bank frets about the possibility of fiscal deficits and inflation, Japanese and ECB moneymen are praying for higher inflation. In this scenario, keeping our rates high in relative rates may not be necessary (Rajan stop giving speeches and act! )
  • Fifth, clearly, the world’s major economies should shift the focus of revival efforts to the fiscal side, and also to enacting more fundamental reforms.

Moral of the Story!!

The world is back to a situation where there are no clear answers to economic issues. Neither the snakeoil of Keynesianism nor the frankincense of monetarism is working. New solutions are needed.

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