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Negative interest rate's positive effects short-lived

The Nikkei Average of 225 selected issues at the Tokyo Stock Exchange (TSE) plummeted on Feb. 10 as growing concerns about the prospects of the world economy and plunging oil prices triggered sell-offs.

    At one point, the Nikkei, the TSE's key index, lost over 500 points, dipping below 16,000 for the first time since October 2014. There is no sign that Japan's share prices will bottom out as unrest in financial markets has not subsided.

    The nosedive of share prices in Tokyo began on Feb. 9 when the Nikkei index fell by over 900 points, the largest fall of the year. Shortly after noon on Feb. 9, market yields from newly issued 10-year government bonds, which are the index for long-term interest rates, turned negative for the first time in history. The share trading room of the TSE was flooded with selling orders.

    The government desperately attempted to put the brakes on the downward trend. Chief Cabinet Secretary Yoshihide Suga told a news conference in the afternoon, "The country's financial system is very sound." He said the government is determined to work with other Group of Seven member countries in responding to the situation.

    The plunge was caused by a nosedive in share prices in the U.S. and European markets the previous day.

    The slowdown in China's economic growth appears to be casting a shadow over the world economy as jobs in the United States did not increase in January as expected. Concerns are growing that loans that financial institutions have extended for natural resources-related projects could turn sour because of a plunge in crude oil prices, prompting investors to sell shares and other high-risk assets.

    Moreover, observations that the U.S. Federal Reserve Board will not steadily raise interest rates have driven down U.S. long-term interest rates, triggering dollar selling.

    Finance Minister Taro Aso warned at a news conference on the morning of Feb. 9 of a sharp surge in the value of the yen saying, "There are violent moves." However, his remark failed to quell unrest among investors, and the yen further appreciated in Tokyo.

    "The yen's appreciation and the plunge in share prices came as more of a shock than the long-term interest rates turning negative," said an executive of a major bank.

    Amid uncertainties spreading through financial markets since the turn of the year, the Bank of Japan (BOJ) decided on Jan. 29 to introduce a negative interest rate, but its effects of driving down the value of the yen and pushing up share prices soon vanished.

    Akio Mimura, president of the Japan Chamber of Commerce and Industry, said he thinks that the central bank introduced a negative interest rate "in order to depreciate the yen and generate positive effects on Japan's economy." He pointed out that the confusion occurred in financial markets apparently because effects of the monetary policy were overwhelmed by the psychological uncertainties prevalent in the markets. He went on to say that even the unprecedented monetary easing policy that the BOJ has implemented under the leadership of Gov. Haruhiko Kuroda cannot overcome risks involving the world economy.

    A senior government official in charge of economic policy said he had not expected that the introduction of a negative interest rate would be so ineffective.

    "The policy caused interest rates to decline just as we had expected. However, we didn't foresee a plunge in share prices and the yen's appreciation. The yen's depreciation and a rise in share prices lasted for only a short period," he said.

    Observers are split over whether these moves are only temporary or reflect a change in the trends of the world economy.

    While some optimistic government officials say that speculators are just looking for ways to make money, there are observations that there are too many risk factors and that the bottom is falling out in the world economy.

    Tsuyoshi Ueno, senior economist with the NLI Research Institute, said uncertainties have destabilized financial markets.

    "The pace of a U.S. interest rate hike and its possible impact on the global economy remains uncertain, as a result of which financial markets have become unstable," he said.

    Some market players had expected that share prices would rebound on Feb. 10 because they plunged so sharply the previous day, but prices continued to fall.

    Masahiro Ichikawa, senior strategist at Sumitomo Mitsui Asset Management Co., is pessimistic about the prospects of share prices.

    "If share prices rise slightly, it triggers sell-offs, preventing the prices from rebounding. There are growing concerns that such a sharp appreciation of the yen could significantly worsen corporate performances," he said.

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