Using negative interest rates to stimulate domestic demand has clearly failed in Japan, argues Mark Konyn, chief investment officer of Asian insurance giant AIA. His view is supported by a review of such policy issued yesterday by rating agency Standard & Poor’s.

Hong Kong-based Konyn told AsianInvestor that Japan was a very good example of how quantitative easing can fail to re-invigorate an economy. While he acknowledged that quantitative easing had been effective in the US in “staving off the very real threat of depression” after the 2008 global financial crisis, Japan has not had the same success.

The Bank of Japan began its negative-rate policy in January when 10-year government bonds were yielding 0.22%. That fell to 0.095% after the announcement and by this week the rate stood at -0.1%

“This concept that liberalising or providing greater access, potentially, to money supply will somehow encourage more risk-taking and a move from savings into investment, or into consumption, has fallen flat on its face,” said Konyn.

Japan’s problems do not respond to levers such as negative rates, because the country has an economic and structural problem linked to its ageing populace, he added. “As soon as you lower rates or make money more freely available, the net effect is you push down interest rates. The natural reaction to that in Japan is to save more, rather than spend more.”

Institutional response

Negative rates may have failed to stimulate domestic demand in Japan, said Konyn, but they have at least helped drive the country’s pension funds and insurers into foreign assets.

Yet Japanese insurers now face another problem, he noted. Previously they could invest in US treasuries and then get a positive carry after hedging back into Japanese yen – “that’s gone now”. With interest rates coming down severely in the US and the yen strengthening, the carry is now negative, added Konyn.

As a result, money is now starting to flow into private equity, from Japan, Taiwan and Korea, from insurers and other institutions that had been in corporate bonds, he said. “That flood into US treasuries has now spilled over into US corporates and private credit, in this mad hunt for yield.”

Recent evidence and comments from institutions in those countries, such as corporate pensions in Japan and state funds in Taiwan, reinforce this view.

While every asset owner is affected by negative rates globally, Konyn said Japanese investors were under more pressure than most. “If you’ve got a mature book, in a business that’s not growing, in a falling rate environment, where you’re getting very little differentiation across the risk spectrum, [that is, spreads are compressed], you’ve got some real issues there, because you’ve got no room for manoeuvre.”

John Kingston, director at S&P Global, takes a similarly dim view of the policy in his report on the topic. “Moving to a negative rate environment, in every circumstance that we’ve looked at, is a clear sign of desperation, with the list of potential economic damage from these policies being substantial,” it said.

The situation in Europe

Europe has had more success with negative rates than Japan, said the S&P report. The European Central Bank and its counterparts in Denmark, Japan, Sweden and Switzerland have all adopted this policy.

S&P’s data from Europe suggests that negative rates are having the desired stimulative effect, either by incentivising bank lending or causing the euro to weaken, which in turn can have a positive impact on economic activity.

But their research shows no evidence of a similar impact for Japanese economic performance. In the second quarter, GDP growth stood at 0.0%, while consumer price inflation fell to -0.4% in June from 0.0% in January, and the unemployment rate remained flat at 3.1% in June, as compared to 3.2% in January.