In a surprising move last week, the Japanese central bank adopted a negative interest rate policy in an attempt to increase market liquidity and help drive inflation back to its target of 2 percent. However, what the Bank of Japan (BOJ) might be trying to do is to prepare for troubles coming from China by pushing lower the value of the yen in advance of further declines in the yuan, as negative rates tend to lower the value of a nation’s currency and help make its goods more competitive in foreign markets.
Japan’s move was the latest action taken by major central banks around the world to encourage domestic economies in the face of weakening growth. Moreover, it is the first central bank in Asia to introduce negative interest rates on some deposits by commercial lenders, which means that lenders parking their money with the central bank are actually charged for doing so. In other words, lenders are encouraged instead to grant loans and hopefully provide some stimulus to boost economic activity.
While central banks’ monetary easing actions seem to place hope on enormous liquidity to support their respective economies, the move also indicates potential concerns about the limits of monetary policy as they deepen their quantitative easing in the face of a slower growth outlook and volatile markets.
Indeed, it might take time for the BOJ’s negative interest rate move and unconventional monetary measures adopted by other central banks to ward off deflation and boost their sluggish economies, but their effects to drive down currencies have so far proven powerful, which only exacerbates the risk of a currency war, as other nations often have little choice but to allow weaker exchange rates of their own.
It is hard to say how quickly actions by other major monetary authorities would have an impact on the Taiwanese central bank. However, on Saturday, the nation’s overnight interbank rate was reportedly guided lower to 0.201 percent — the lowest since August 2010 — from 0.23 percent, a move that indicates the central bank might act to cut policy rates again in the near term, as the overnight rate move is usually followed in conjunction by policy-rate adjustments.
To boost the slowing domestic economy, the central bank last month cut its key interest rates by 12.5 basis points for a second consecutive quarter. Nonetheless, the odds for yet another rate cut by the central bank remain high as long as a regional currency devaluation race continues, and if China’s economy continues to slow down. Global trade weakness and inventory depletion in the electronics sector are seriously hurting Taiwanese exports, especially after the government on Friday reported that GDP contracted for a second straight quarter in the fourth quarter of last year, shrinking 0.28 percent year-on-year. Overall, the economy grew 0.85 percent for the whole of last year — the weakest performance in six years — because of lackluster export performance.
Following a sluggish year last year, some people might be expecting the Year of the Monkey to bring new hope to the economy, as the nation’s newly elected legislators are sworn into office today and the new president is to take office in May. However, other than appropriate responses to concerns over a hard landing in China’s economy, the pace of rate hikes by the US and a plunge in oil prices, the central bank and other government agencies might have to reconsider whether their monetary policy and stimulus measures have, thus far, generated only a limited effect and are less likely to revive the economy than previously thought.
To reinvigorate the nation’s faltering growth, the key is to implement both stimulus and reform measures in unison. Executing rate cuts and currency depreciation without adapting underlying reforms can go only so far. However, the road to reform is never an easy task; it requires a determined government backed by good policy execution and efficient bureaucracy.
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