Yen hits 34-year low, defying end of negative rates

The Bank of Japan (BoJ) raised interest rates for the first time in 17 years on March 19, bringing an era of negative interest rates to an end. The key rate was hiked from –0.1% to a band from zero to 0.1% – a token effort to offer some tightening after decades of loose but unsuccessful monetary policy.

Despite the adjustment, Japan remains the major economy with the lowest interest rates in the world. In my opinion, the move is not designed to end Japan’s monetary policy dilemma; instead, it confirms the central bank’s role in supporting the US dollar.

Negative rates were ostensibly adopted to stimulate the economy, based on the idea that lower interest rates lead to higher growth. But the negative rates were never a stimulus to the economy.

They served as a tax on the reserves held by commercial banks at the central bank. Under negative rates, banks had to pay the central bank, squeezing their profit margins as soon as the rates were imposed (in 2016 in Japan).

Since banks in Japan never extended negative rates to deposits made by bank customers, they passed this penalty onto borrowers. This was relatively easy to do as small Japanese firms have been desperate for more bank loans for 30 years. As a result, lowering rates into negative territory actually raised borrowing rates for loan customers.

Due to the squeeze on bank profits, the years of zero and negative rates (the BoJ had already reduced interest rates to 0.001% in the 1990s) have also forced thousands of small banks in Japan (likewise in Europe) to merge with bigger banks.

Central planners love the idea of a concentrated banking system with a few big banks. But it is small firms and the middle class that get crushed. Research has found that bigger banks lend