In this article I found an interesting solution to Japan’s deflation problems – negative interest rates at the BOJ. I think I had heard of this option before but only in a flippant way and never took it seriously. The author here seems to be very serious about the proposal.
And indeed in the short term such strategies will need to be considered. One of PM Kan’s deflation-fighting measures is the increase in the consumption tax. The idea here is that by improving the government’s fiscal situation, and not worsening government debt any further before the government has to start borrowing from overseas lenders, we can first of all be more sure there will be a sovereign independent country called “Japan” in the future in which to live out your life peacefully, and more so the government will be able to support and sustain the same level of social security spending that will enable you to do this. Thus, people will spend their money now, and not hoard it so they can retire in Hawaii, Bali, or perhaps might I suggest, New Zealand.
Now assuming that this has the desired effect, it is only ever going to be a long-term one as people start to recalibrate their sense of their lifetime earnings (which they will want to do only when the economy recovers….). In the short-term it certainly is not going to help battle deflation, and may well make it worse.
A negative inflation rate could be just the ticket. It is kinda weird and would certainly raise eyebrows of overseas investors….but said eyebrows may already be approaching their owners’ receding hairline. Essentially banks would have to pay the BOJ for the BOJ to keep their money. And since banks are required by law to keep a certain amount of their liquid monetary assets with the BOJ, then it really is in your interests to get the money out the door. Brilliantly tautological.
Of course, a sensible person would immediately ask: “Is a negative nominal interest rate even possible??”.
Apparently, yes, and thanks to Sweden, has been done already.
In economics it is often difficult to separate out the short-term and the long-term and this is no exception. The long-term strategy for fighting government debt and deflation will only work if deflation is not worsened in the meantime (and thus hardening the cultural tendency to save money – deflationary pressures essentially create a negative savings scheme where a constant amount of money appreciates in value) and if the economy is improved (while at the same time increasing the tax base, and not worsening the fiscal situation)- the two things going together. If short-term measures are not taken into consideration, it may well all be for naught.
I think it bears thinking about at the very least.