Meanwhile, exports collapse at fastest rate since 2009.
This would be hilarious, if it weren’t so serious: Frazzled politicians, during a parliamentary session, lambasting the governor of their central bank over its new negative interest rate policy. But this is what happened in Japan.
Central-bank imposed negative interest rates have caused a lot of financial mayhem. Since they’ve contaminated much of Europe, they’ve dragged most major stock indices into a bear market. In the US, stocks fell hard as well. The Nasdaq sidled up to a bear market before bouncing off and is now down “only” 14% from its peak. The Russel 2000 is in a bear market, down 22.4%.
In Japan, stocks have gotten mauled since the Bank of Japan inflicted the idea of negative deposit rates on the land three weeks ago, after Governor Haruhiko Kuroda had repeatedly assured parliament that he wasn’t even considering the idea. Despite a bounce earlier this week, the Nikkei is down 24% from its recent high.
It doesn’t matter that, under the BOJ’s three-tiered system, no deposits qualify yet for the special treatment. It’s the idea that counts. It’s all a mind-game.
And so on Thursday, Kuroda stood before Parliament to be lambasted from all sides. According to DJ Business News, he “found himself dodging a concerted attack in Parliament from lawmakers who charged the policy was victimizing consumers and sending a message of despair.”
Opposition lawmaker Shinkun Haku needled Kuroda: “Can you deny that banks will put an additional burden on average depositors” by charging fees or interest on deposits? “If you can’t deny it, don’t. It’s a yes or no.”
Kuroda dodged the jab the best he could, refusing to speculate on fees but said that “there’s no chance that deposit interest rates will turn negative.”
He referred to the great things negative deposit rates have already accomplished in Europe, that they encouraged lending, etc., etc., but had few harmful effects. “Europe has much larger minus interest than the Bank of Japan, and I haven’t heard of minus interest rates being applied to individual depositors there,” he said, though we’ve heard of it. “Punishment interest,” Germans called it.
Other lawmakers jumped into the fray.
“You have sent a message to the people that they had better watch out because Japan’s economy is in trouble,” Communist Party lawmaker, Akira Koike, threw at him.
Opposition lawmaker Motoyuki Odachi accused him “of sounding like a World War II propaganda broadcast.”
Even ruling-party member Masahiro Ishida plowed into him. The policy was hard to grasp, he said, and “it could have the opposite effect of confusing the market.”
Confusing the market? Which market? The one that central banks are trying to manipulate with all their might? Yup, that’s the one. NIRP is “confusing” it. “Confusing” means: it’s sending it south. Everyone knows, the only correct direction is up, especially since the BOJ is buying ¥80 trillion ($700 billion) a year in government bonds and other securities, including equity ETFs and J-REITS, for the sole purpose of inflating asset prices.
Plunging stocks in Japan and around the world are not part of the plan. Nor is the uppity yen that, despite all efforts to crush it, has jumped against the dollar since the announcement of NIRP. Crushing the yen was supposed to increase Japanese exports so that they would pull Japan out of trouble. But exports too are plunging.
In the first half of 2015, exports still rose 7.9%. But then exports fizzled. They dropped 2.2% in October, 3.3% in November, 8.0% in December. And the Ministry of Finance just reported that exports in January plunged 12.9%, the biggest drop since October 2009!
Exports to China plunged 17.5%. Exports to Hong Kong – most of it for transshipment to China – plummeted 26.2%. Exports to all Asian countries fell. In nine of the 11 Asian countries listed, exports plunged between 15.8% (Malaysia) at the low end and 26.2% (China and Vietnam) at the high end. Yes, this report is one ugly dude!
So if negative deposit rates crush stocks, boost the yen, and wipe out exports, in addition to punishing savers, retirees, banks, and fixed-income investors like insurance companies, what good are they?
Is that why these policies weren’t gaining public support? DJ Business News cited an unnamed “official” who explained the phenomenon this way:
“Those who understand this policy are criticizing us, and those who do not are also criticizing us.”
And the public doesn’t care for them one bit. Sure, Japan Inc. gets cheaper loans to fund projects in Thailand or Vietnam. But Japanese society has a lot of retired folks who live off their savings and pension incomes. They’ve already gotten whacked by the consumption tax hike and price increases, while their interest incomes have disappeared and pension payments have stagnated. They’re planning on living long healthy lives. So they’ve tightened their belts, and that’s not great for the economy. But they’re in no mood to pay fees or interest on their savings.
So the BOJ has a tough job: Beyond the financial manipulations, it is, as the DJ Business News put it, “struggling with a different and equally hard-to-control force: public opinion.” That negative reaction against NIRP from the public and the markets left the BOJ “baffled.”
That’s what it boils down to. These sorts of scorched-earth monetary policies are a confidence game. People, particularly investors, need to believe in them and in central banks as if they were divine forces, they need to blindly and in unison follow their guidance, and not deviate or look at reality, but when that leap of faith suddenly fails, all heck breaks loose.
And this is what we get: global trade is skidding south at a breath-taking speed. Read… I’m in Awe at Just How Fast Global Trade is Unraveling