Sub Zero
Last month, the Japanese central bank (which sets monetary policy in the world's third-largest economy) followed what other central banks in Switzerland, Sweden, Denmark and the euro area had already done - establishing a negative interest rate. Just under a quarter of the world's GDP now originates in countries with negative interest rates - seems the lower boundary for rates is no longer, as has been assumed, zero.
Technically, this means that the Bank of Japan levied a 0.1% charge on a portion of the reserves that commercial banks deposit with it - a remarkable move given that such reserves in all countries have normally earned a positive rate of return. The idea - in Japan and elsewhere - is to spur banks to lend (growth in bank credit in the rich word has been dismal), rather than hold reserves, thereby boosting aggregate demand and inflation. Despite years of low - and falling - interest rates, economic recoveries are at best weak everywhere, and inflation is so persistently low as to raise the specter of deflation. Bond markets reflect such concern: in Germany, government-bond yields are now negative for terms of up to eight years, and up to ten years in Switzerland; in America, the 10-year government-bond yield dropped below 2% - despite the Federal Reserve raising its federal-funds rate in mid-December, for the first time in seven years.
Negative interest rates are not good for banks. In any financial environment, deposit rates cannot be lowered as far or as fast as lending rates; especially in an already low-rate environment, the fear is that at some point savers decide to switch to cash. Negative interest rates signal that indeed they should (though deposits in Europe, where rates have been slightly negative for over a year, have so far been stable). This margin squeeze impairs banks' profits and balance sheets - evident now particularly in Europe, where commercial bank solvency is once again in question, and in America, where bank shares have been under pressure since the beginning of this year.
A negative-rate world is extraordinary. To grasp the concept, think of an economy in which, for example, manufacturers pay their suppliers well before they have sold their finished products, and ask their own customers to pay slowly; where the IRS asks citizens to hold off paying their taxes; where a penalty is charged by credit card companies to card-holders paying on-time; or where buying a car for cash is more expensive than financing it. All of this is possible, if negative interest rates persist and spread.