January 2016, the Central Bank of Japan made a remarkable decision: for the first time, the Japanese economy would feel the effects of a negative interest rate. After decades of low productivity and commerce, the central bank had no other option after running out of ideas on how to create economic growth.
Ever since the 1980s, Japan’s economy remains in limbo due to an aging population. As the ratio of workers to retirees keeps decreasing, Japan has hit a breaking point and continues to experience stagflation with little to no improvement in GDP growth. A Goldilocks state: not too hot and not too cold.
Originating from The Lost Decade: a prolonged period of slow economic growth in the Japanese economy, “Japanification” is the latest phrase to describe the ongoing problem of stagnation we see across the world. As economies globally experience little to no prosperity under the current fiat monetary system, many are starting to undergo the process themselves.
Following Japan’s population peak in 2008, there are clear signs of Japanification in other parts of the world. Countries with low birth rates such as Sweden, Denmark, and Switzerland, are already following in the footsteps of Japan having introduced negative deposit rates in their interbank markets— the overnight lending market between banks.
If the global trend of Japanification continues, the next economy to experience its full effect is China with its population set to peak in 2029 — mainly due to the one-child policy launched by the Chinese government in the 1970s. And while the European Central Bank (ECB) is predicting Europe’s population will peak in 2044, the biggest economy in the world, the U.S, has the slowest rate of population growth since 1937 during the midst of the Great Depression — now that’s food for thought.
Recent political and monetary concerns around the world have exposed the fragility of economies with slowing population growth: Trade war tariffs, a crisis in money markets, and Brexit uncertainty caused the majority of central banks to stop raising interest rates and reverse the process trying to counteract any damage done.
As the most influential financial institution, The Federal Reserve, cuts rates from 2.5% to 1.75%, along with other major central banks like the Reserve Bank of Australia, clearly there’s something very wrong with the global financial system as it fails to stabilize in an environment of rising borrowing costs. Monetary stimulus is the screw missing from the global economic engine and without it, consumers — who have little to no savings — can’t borrow money on the cheap, causing the system to fall apart.
Therefore, central banks will do, in the words of Mario Draghi, “whatever it takes,” to maintain stability within the financial system even if that’s by introducing negative rates. Many central bankers around the globe are open to the idea with former Federal Reserve chair, Janet Yellen, considering them in 2016, and recently the new head of the ECB, Christine Lagarde, saying, “in the absence of the unconventional monetary policy adopted by the ECB — including the introduction of negative interest rates — euro area citizens would be, overall, worse off.”
But while central bankers are hinting at the possibility of going or staying below zero, the consensus within the finance community is it’s unlikely to become part of central bank policy in major economies like the U.S, United Kingdom, and Australia. Jim Cramer, the Mad Money host, says, “It’s a sign of weakness,” and Wall Street veteran, Milton Ezrati, remarks, “Not any time soon,” showing distinct signs of a confidence bubble in central banks being able to save economies in the developed world without implementing negative rates.
But here’s the status quo: every major economy is echoing Japan’s issues: the declining demographics, the central bank stimulus, and the excessive printing of money — problems that aren’t going away any time soon.
As the entire world follows the same economic model and design, it’s almost a certainty that we’ll voluntarily or involuntarily embark on one of the riskiest monetary experiments of our time: a globally synchronized world of negative interest rates.