How about a savings account with an interest rate of minus 4%?

Some interesting ideas about how Japan (and by extension the rest of us) can get out of the deflation trap in today’s Times.  The article, "To fight deflation, abolish cash", proposes that getting rid of physical money will allow policy makers to do something not possible in a world where the population can hoard bundles of bank notes in sock drawers – namely to set an effective negative nominal interest rate.  Many economists suggest that Japan needs interest rates of around -4% (and a similar number has been talked about for the Euro area).  Abolishing yen notes and moving fully to electronic payment systems would allow policy makers to apply negative interest payments to "hoarded" money, and thus encourage spending rather than saving.  Whether it would simply encourage spending on gold bullion and foreign banknotes is another question, but whether it’s spending on non yen financial assets or on domestic consumption, negative nominal rates should eventually generate inflation.  Such a radical measure in an economy where the amount of cash circulating is over 6 times higher than in most developed economies is unlikely to be implemented, despite some political support, which in part explains why the Japanese government bond market continues to expect  average deflation of -2% per year for the next decade.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Categorised as: duration rates and yields

Discuss Article

  1. Andrew Moore says:

    Surely this will not work without a major shift in economic thinking. The new Labour approach to poverty and distribution of wealth never reached the populace at large in fact we know that the encouragement of enterprise meant that the winner took all the prizes and concentration of wealth the result.

    A reversal of policies of encouragement to save must be supported with a social policy that improves the lot of the lower earners who already spend all they have. They deserve a larger share of the economic cake. A continuation of Micawberish policies of keeping the majority of the population marginally above absolute poverty is not conducive to a productive economy.

    Even the Japanese would continue to resist attempts to remove their cash despite the prospects of continued poor returns!?

     

    Posted on: 19/06/09 | 12:00 am
  2. Martyn Page says:

    Abolish zero coupon bearer bonds and then destroy people's savings at a rate of 4% a year? That's a vote winner.

    Presumably the Japanese think that welcoming young, fertile immigrants into their economy to boost GDP while replenishing the tax base is a laughably crazy and unworkable alternative?

    As Wittgenstein once said "A man will be imprisoned in a room with a door that's unlocked and opens inwards; as long as it does not occur to him to pull rather than push."  Perhaps Japan should stop pushing? 

     

     

    Posted on: 19/06/09 | 12:00 am
  3. Anonymous says:

    @Andrew Moore

    couldn't agree more re your comment on the need to have a very different social policy in place, my only qualification to what you wrote would be that lower earners don't just spend all they have, they also borrow to try and meet their rent , repay mortgage debt etc.

    If we didn't have such an ill divided society with huge rewards available to those at the top in a position to manipulate things for their own benefit at the expense of the majority, it is quite possible we would never have had the credit crunch nor the ever increasing unemployment problem 

    Posted on: 23/06/09 | 12:00 am

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