What is ZIRP?
Japan - The first country in the world to implement ZIRP during the years in 1990’s.
Japan was
officially in an economic bubble during the years between 1986 to 1991 when
Real Estate and Stock prices were highly inflated. By 1992, the bubble in the
asset price had burst and the economy stagnated. The bursting of the Japanese
asset price in 1992 led to huge accumulation of non-performing assets loans
(NPL), causing difficulties for many financial institutions. Equity values
plunged 60% from late 1989 to August 1992, while land values dropped throughout
the 1990's, falling an incredible 70% by 2001. The Bank of Japan (BoJ) decided
to bring an unconventional monetary policy such as quantitative easing to increase the monetary base. As a result, since the 1990's interest rate
policy in Japan increasingly moved toward the zero-lower bound. Three decades
later, the country is still stuck in a zero-interest rate and has never been
able to raise the rates again.
(For comparison, US data is provided in the image above)
What triggered ZIRP in Japan?
After World War II in 1945, it took Japan about 15 years and from the 1960's to 1980’s it became the envy of the world. Japan caught up economically with the Western world. The economic growth of this period was to go down in the history books as Japan's post-war economic miracle. Companies such as Sony, Panasonic, Toyota, Mitsubishi, Hitachi became increasingly feared international competitors. They knew how to take over key technologies from abroad, improve them continuously, and conquer international market share step by step. Japan grew at an average annual rate (as measured by GDP) of 3.89% in the 1980's, compared to 3.07% in the United States.
The BoJ started to worry about inflation and asset prices in the 1980’s and decided to put the brakes on the money supply in the late 1980's. This may have contributed to the bursting of the equity bubble and as equity values fell, the BoJ continued to raise interest rates because it remained concerned with still-appreciating real estate values. Higher interest rates contributed to the end of rising land prices but also helped the overall economy slide into a downward spiral. In 1991, as equity and land prices fell, the BoJ dramatically reversed course and began to cut interest rates. The innovative products of Japanese manufacturers that grew rapidly in the 1960's and 1970’s started to fade in the late 1980’s.
When the economy becomes stagnant and Zero Interest Rates Policy fails to stimulate the economy, there comes a huge social effect on the population of the nation. During normal times, the goal of a Central Bank is to increase corporate investments and consumption by lowering the interest rate but could end up in a Liquidity Trap. So, what exactly is a Liquidity Trap? During an economic crisis, such a policy might lose its potency: Instead of stimulating economic activities, lowering the interest rate may end up stimulating a higher demand for cash-like assets. And why cash like assets? Because the Govt and Central Bankers want the Investors to spend, but Investors want to avoid investments during uncertain times and rather do not mind parking money under Govt Notes even if it means losing some amount of the capital.
What does uncertain economics do?
During uncertainty, the country loses its economic power and economic culture. This loss of economics further spirals down to loss of Power of Innovation. Power of Innovation is the key linking companies directly to progress and market leadership in most industries. The power of innovation spreads further than breakthrough solutions – it spreads to the people as well. Zero interest rates counteract the power of innovation. Three decades after Interest rates started going down, the country is still stuck in a zero-interest rate trap and the magic and innovative power of Japanese companies has diminished considerably. The opportunity costs of this zero-interest rate policy are also reflected in the dwindling innovative strength and productivity.
The zero and negative interest rates have not only paralyzed the innovative power of Japanese companies, but in the same breath they have also affected the working population. Younger people have been hit the hardest. As recently as 1992, 80 percent of young Japanese workers had a regular job. In 2006, half of all young workers were in part-time jobs with lower wage levels. Only 2 percent of non-regular workers in Japan move to regular work each year. Most of today's young workers are unlikely to find a regular job. Once a country embraces Zero interest rates policy for a long duration, the change in the culture shifts from Economics to Social for a near permanent period. Zero and negative interest rates are a reality in Europe and will soon be in the US as well.
In the West, the first "signs of resignation" are beginning to appear, particularly among millennials and younger generations. A growing proportion of them seems to be subconsciously realizing that they have to adjust to an increasingly stagnant life. Stagnation in the economy leads to decline in total output, flat or slow growth. Stagnation results in flat job growth, no wage increases, and Consistent unemployment. Once there is lack of development, advancement, or progressive movement: a stagnant economy. inactive, sluggish, or dull pushes people to resort to means of earnings from riskier activities like Day Trading in Stock Markets. Due to Lack of regular full-time jobs, flat industrial growth, Artificial Intelligence (AI), and Automation have led to loss of income and a rising inflation hand in hand leads to social unrest and means of earning from speculative trades. It is estimated that less than 10 % of the population who indulge in day trading are successful, which means real earnings from speculation is only a myth.
Once real earnings are not visible for a long time it will lead to a full-blown social unrest which further will be directed towards anger and frustration against which more and more people take to the streets in demonstrations. In Japan, people are withdrawing more and more from civil society and the public sphere into their own four walls. According to the OECD. Japanese workers sleep less than their colleagues in other Western economies, averaging 442 minutes per twenty-four hours. In the USA, for example, this average is 528 minutes. These are warning signs and they are about to increasingly happen in Europe and the US. If the consequences of ZIRP are not taken seriously by the authorities, it may lead to people's growing hatred of people who will be directed at the wrong culprits. In addition to the economic consequences, the social consequences must be considered, as these often weigh more heavily in the long term.
Credits: Pascal Hügli
