Could Japanese interest rates trigger a global financial crisis?

TOKYO, Jul 13 ( - Higher Japanese interest rates could threaten global financial stability if they prompt the Japanese to repatriate enough of the US $3.8 trillion they hold in foreign investments.

The Japanese are the biggest foreign holders of US Treasuries (at 4 per cent). They hold 11 per cent of Australian debt, 10 per cent of Dutch bonds, and 8 per cent of New Zealand’s debt, between 1 and 2 per cent of major stock markets, and 6 per cent of eurozone debt.

The background to the threat is this. Since the Japanese asset bubble burst in the early 1990s, the Bank of Japan (BoJ) has undertaken the world’s boldest monetary experiment to revive Japan’s economy and combat deflation.

In 1999, the BoJ pioneered zero benchmark interest rates. In 2001, it invented quantitative easing. In 2016, it adopted negative interest rates, a policy devised by Denmark four years earlier. It also conceived the policy of ‘yield-curve control’.

Central banks usually control just one short-term interest rate (in Australia, it’s the cash rate) and allow other rates to be set by the market. But for the past seven years, the BoJ has controlled another rate as well. It anchored Japan’s yield curve by fixing the 10-year government bond yield at 0 per cent. (This is something the RBA attempted to do to three-year Australian government bond yields but failed.)

The BoJ’s yield-curve policy was only intended to be a short-term fix because it was confident lax monetary policy, one of the ‘three arrows’ of Abenomics, would stir inflation to its 2 per cent target. (The other arrows of Shinzo Abe’s radical economic policy were fiscal super-stimulus and micro reforms.)

But Japan’s economy remained plagued with sporadic deflation and stop-start growth. So, Japanese investors ventured overseas for decent returns, and monetary policy stayed aggressive. ...continue reading