Last week Italy began to experience runs on their banks as fear over solvency in some of their financial institutions are leading many to believe the next round of bail-ins on the European continent are now beginning. And with the Bank of Japan implementing negative interest rates (NIRP) on Jan. 29, an even greater fear may be coming as a result of this move as historically, negative interest rates lead not only to runs on the banks by depositors and account holders, but potentially an all-out capital flight as citizens and investors rush to move their money offshore and into assets where they might gain a return, instead of losing their some or all of their wealth.
When nations are forced to implement negative interest rates within their banking system, it is a clear sign that monetary policy has gotten away from central bankers and that there is little left that they can do but to try and coerce people into spending to try to stave off deflation through artificially stimulated growth. But in the end this policy is a double edged sword, because artificial stimulus of any type more often than not creates inflation in the wrong areas, such as in prices for good and services, which then leads to an environment where wages cannot keep up with these rising prices.
Today, Deutsche Bank’s Japan analyst Mikihiro Matsuoka jumps on the bandwagon and adds that “we are worried about a possible opening of a Pandora’s Box by explicitly removing the lower bound of nominal interest rates.”
As the monetary base target of expanding by JPY80trn a year continues, the tax on financial institutions expands rapidly also, even if an upper bound on excess reserves that are subject to the negative rate is set. The net interest margin of Japanese commercial banks is lower than in other countries.
The negative interest rate is, in effect, a tax on financial assets, and not the BoJ’s intention. This could lead to an opposite outcome to that of the initial intention, whereby the country encourages companies and households to engage in capital outflow.
It is that last bullet point which is most important because it leads us to the most disturbing topic of all for Japan – the risk that NIRP backfires and leads to another “China”, where the local citizens rush to park their assets offshore, resulting in a slow at first then rapidly accelerating capital outflow. This is how DB explains it:
If the negative interest rate continues for longer or goes deeper, commercial banks may have to set negative interest rates on deposits, which would expand not only the tax on commercial banks, but also on depositors (households and companies). This could lead to a ‘silent bank run’ via a shift of deposits to cash (banknotes), which in turn damages the sound banking system by enlarging the leakage of funds from the credit creation mechanism in the banking system. – Zerohedge
Japan more than any other economy has driven themselves into a hole by their own actions and volition, and not simply from ‘Black Swan’ economic factors such as those that led to the 2008 global credit crisis. This is because Japan has been functioning under policies of zero interest rates and monetary stimulus for well over 20 years, and if it weren’t for their vast productive industry as the 3rd largest economy in the world, it is very likely they would have fallen into depression or even hyperinflation long ago.
But now appears to be different, with Japan finally reaching an untenable place where they can no longer simply print more money and sell more bonds to create inflation and artificial growth. And this final act of negative interest rates could be the catalyst for a society long built on internal sacrifice to decide that enough is enough, and choose to move their money elsewhere before it disappears within their own system.