Japan – Why Negative Interest Rates?

A number of countries have implemented a negative interest rate policy (NIRP).  Why?

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Generally Central Banks try to stimulate their country’s economy by lowering interest rates.  This encourages banks and businesses to issue loans or take out loans.

Japan had a +0.1 interest rate and had nowhere to go but negative to lower interest rates in order to stimulate their economy.

Here is how it works.  Banks usually pay interest to use your money.  Instead a negative interest rate works like a safe deposit box. You pay to have the bank hold your money.

Unfortunately, people would rather have cash which results in hoarding and does the opposite of stimulating the economy.

For more information, see this website:

http://www.bloombergview.com/quicktake/negative-interest-rates

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Central Bank of Central Banks Warns Of Crash

The Bank for International Settlements, BIS, warns that silence is NOT golden.

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The BIS has been warning for years of the dangers of very low interest rates.

“A common mistake is to take unusually low volatility and risk spreads [aka silence] as a sign of low risk when, in fact, they are a sign of high risk-taking,” said Claudio Borio, head of the monetary and economic department at the BIS.

Borio added that the last time uncertainty was this low was in 2007 just before one of the largest forecast errors the economics profession has ever made [aka Great Recession].

Now the BIS has warned the world again.  This time with specifics.

The BIS said 55% of collateralised debt obligations (CDOs) now being issued are based on leveraged loans, an “unprecedented level”. This raises eyebrows because CDOs were pivotal in the 2008 crash. “Activity in the leveraged loan markets even surpassed the levels recorded before the crisis: average quarterly announcements during the year to end-September 2014 were $250bn,” it said.

See the following link for more information.

http://www.marketwatch.com/story/low-volatility-is-a-sign-of-high-risk-taking-bis-official-says-2014-09-14?siteid=nwham

Does the BIS have to get out its big guns to make its point?