Comment on Ken Belson's "Two Japanese Banks Lower an Interest Rate"

Takahiro MIYAO (GLOCOM)

This comment originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on March 31, 2002: posted here with the author's permission.

New York Times article: http://www.nytimes.com/
" Two Japanese Banks Lower an Interest Rate to 0.001%"
By KEN BELSON "TOKYO, March 29: Two of Japan's largest banks said today that they would slash the interest rate they pay on ordinary savings accounts to 0.001 percent, just one-twentieth of the already tiny 0.02 percent they pay now.....For the consumer, the change removes any pretense that a bank account is an investment……Depositors also face the risk that the Bank of Japan will accede to political demands and explicitly try to restart inflation in the country by flooding it with even more yen than now. Because inflation usually moves faster than interest rates once it gets going, many depositors may react to its reappearance by sending money to interest-bearing accounts overseas.

Miyao's Comment:
Regarding Ken Benson's article above, I do not agree with much of what he says. First, I suppose that, in spite of the decrease in the interest rate, many savers will continue to regard their ordinary bank savings as a relatively good investment, because the purchasing power of their savings balance even with no interest will increase as deflation continues and also because other investment vehicles may be considered either riskier or less profitable than bank savings, especially when capital losses are taken into account. In other words, many people know that in time of deflation, the "real" interest rate for their savings account (the "nominal" interest rate plus the deflation rate) is much higher than its nominal rate, and low nominal interest rates themselves are a result of deflation.

A problem with deflation is that since the "nominal" interest rate cannot go down below zero, the "real" interest rate remains too high to stimulate business investment and consumption. This is why quite a few economists are urging the Bank of Japan to adopt inflation targeting policy as a part of economic stimulus measures.

It would be good if we could restart inflation with relatively stable interest rates, because that should make depositors spend their money and stimulate the economy in general and the stock and real estate markets in particular, attracting money from domestic as well as overseas investors.