Japan: Symptom of a Larger Financial Crisis?

Conventional wisdom dictates that money should be deposited in a bank rather than under a mattress. Aside from the security motives, the bank typically pays an interest, even if minimal, to depositors. This is all the more reason to store your money at a bank rather than your house. But this classic adage appears to be no longer applicable as the world enters another recession, which is poised to be worse than the 2008 economic crash.

Recently, the Bank of Japan announced it was implementing negative interest rates . Even though seen as a surprise to many, this tool is not a novel financial innovation but has previously been implemented by other major governments to no avail. As the world enters a deflationary cycle, this financial tool should not be considered farfetched because more countries including the US might use such tactics to help create the inflation rate that central banks desire.

What Does It Mean?

The Bank of Japan announced the new rate would be minus 0.1% for excess reserves . This means depositors will be required to pay a “fee or tax” for placing their reserves in the bank. Since the 2008 crash, economies across the globe have tried to employ different financial tricks to buoy their languishing economies. These tactics included quantitative easing, currency devaluation/printing, and reductions in interest rate. The intent behind these methods was to spur an economic revival. These strategies, despite their burdensome cost on taxpayers, have yielded momentary bliss at best but have not helped the economies escape the abyss. With oil nose-diving and other commodities falling in price, the global economy is bracing itself for a deflationary cycle. Ideally, central banks desire an inflation rate around 2-3% to ensure price and economic stability. Despite attempts, many nations around the world including Japan have failed to achieve this sought after rate. Thus another tool is rolled out; negative interest rates. The intent is to create a disincentive to save. Although sounding a bit oxymoronic and financially imprudent, central banks despise the high savings rate it is currently seeing amongst its business and individual depositors . For now, the Bank of Japan has mainly targeted financial institutions in order to dissuade them from accruing cash. In theory, this “fee” would make the institutions more apt to lend and spend money, which will create the desired inflation and revive the economy.

Foreshadowing a Larger Looming Economic Meltdown

2016 began as an abysmal year for global financial markets. The Chinese stock market is crashing, oil prices are falling to new lows, and it appears the world is entering another recession. Despite the claim by politicians that the global economy was rescued from the brink of collapse, it is all a fata morgana. In reality, the world never fully recovered from the last meltdown. Instead the global approach was to flood the markets with printed currency, using a bandage solution for a larger endemic issue, which is starting to peel off quickly. Even though the Bank of Japan’s measures are limited to financial institutions at this time, if the results are not favorable, expansion of this method can extend to everyone. Negative interest rates are not a new phenomenon; the European Central Bank undertook a similar measure last year in a failed attempt to revive the ailing EU economies . It failed to yield the outcome they desired and some of their member states’ fragile economies are on the brink of collapse today. Italy appears to be one of those nations. Thus to avert a repeat of 2008, Italy has implemented another financial tactic; “bail-in”. The “bail-in” approach will allow the banks to be rescued by levying any losses incurred on large depositors and creditors . Even though the “bail-in” has been relegated to a certain segment of bank depositors at the moment, it could always be extended to all depositors if the situation worsens similar to Cyprus’ financial fiasco .

All these measures are a precursor of what is to come in the global financial system. The unfavorable economic conditions in these countries are symptom of a larger impending economic issue that will affect most of the globe. This financial tactic will not rescue Japan from the upcoming economic recession. As people watch the Japanese implement these financial measures, they should be more apprehensive about what may come to a bank near them in the near future.

Luis Durani
Luis Durani
Luis Durani is currently employed in the oil and gas industry. He previously worked in the nuclear energy industry. He has a M.A. in international affairs with a focus on Chinese foreign policy and the South China Sea, MBA, M.S. in nuclear engineering, B.S. in mechanical engineering and B.A. in political science. He is also author of "Afghanistan: It’s No Nebraska – How to do Deal with a Tribal State" and "China and the South China Sea: The Emergence of the Huaqing Doctrine." Follow him for other articles on Instagram: @Luis_Durani