Thread by @FinsenseG

Japan has negative interest rates? What, why, how?

Negative interest rates mean depositors pay money to the bank to hold their money, a reversal of the normal rules of economics.

To battle the global financial crisis accelerated by the collapse of Lehman Brothers in 2008, many central banks cut interest rates to near zero. A decade later, interest rates remain low in most countries due to subdued economic growth.

With little room to cut rates further, some major central banks have resorted to unconventional policy measures, including a negative rate policy. The euro area, Switzerland, Denmark, Sweden, and Japan have allowed rates to fall slightly below zero.

With -ve rates, central banks charge a fee instead. The idea is to encourage banks to put their money to more productive use, lending it to households and businesses.

Negative rates are supposed to then ripple through economies by lowering the cost of borrowing for everyone — something that should encourage economic growth).

Under a negative rate policy, financial institutions are required to pay interest for parking excess reserves with the central bank. That way, central banks penalize financial institutions for holding on to cash in the hope of prompting them to boost lending.

Those with ultra-low inflation or deflation, meaning falling prices associated with weak economic growth.

Aside from lowering borrowing costs, advocates of negative rates say they help weaken a country’s currency rate by making it a less attractive investment than that of other currencies.

A weaker currency gives a country’s export a competitive advantage and boosts inflation by pushing up import costs.

This is one of the reasons why Japan is financing the Mumbai Ahmedabad bullet train project worth Rs 79000 Cr at 0.1%.