The Effectiveness of the Negative Interest Rate Policy in Japan

In April 2013, the Bank of Japan (BOJ), in order to overcome deflation and achieve sustainable economic growth, introduced an inflation target of 2 %. However due to the lower oil prices in the global market, this target could not be achieved for a long-term period. In Feb 2016, the BOJ took further steps, and started a negative interest rate policy, by increasing massive money supply through purchasing long-term Japanese government bonds (JGB). Previously the BOJ only purchased short-term government bonds. This policy has flattened the yield curve of JGBs. Banks started to reduce purchasing government bonds, because the yield of short-term government bonds" became negative, and even for long-term government bonds up to 15 years the interest rates became negative. On the other hand, bank loans to the corporate sector did not grow, due to the vertical investment-saving (IS) curve in the Japanese economy. This paper discusses that first, in the low oil price era, the BOJ has to modify the inflation target of 2 % and reduce it, secondly it argues that the role of monetary policy and the negative interest rate policy in Japan cannot recover from the current recession and deflation situation for the long term. What is important is to make the IS curve downward sloping rather than vertical. That means the rate of return on investment must be positive and companies must be willing to invest if interest rates were set too low. The recession in Japan is coming from structural problems that cannot be solved by the current monetary policy. The last section reports a simulation results of tackling aging population of Japan by introducing productivity based wage rate and postpone retirement age will help the recovery of Japanese economy.