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Japan: Symptom Of A Larger Financial Crisis? – Analysis

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By Luis Durani*

Conventional wisdom dictates that money should be deposited in a bank rather than under a mattress. Aside from the security motives, the bank typically pays an interest, even if minimal, to depositors. This is all the more reason to store your money at a bank rather than your house. But this classic adage appears to be no longer applicable as the world enters another recession, which is poised to be worse than the 2008 economic crash.

Recently, the Bank of Japan announced it was implementing negative interest rates . Even though seen as a surprise to many, this tool is not a novel financial innovation but has previously been implemented by other major governments to no avail. As the world enters a deflationary cycle, this financial tool should not be considered farfetched because more countries including the US might use such tactics to help create the inflation rate that central banks desire.

What Does It Mean?

The Bank of Japan announced the new rate would be minus 0.1% for excess reserves . This means depositors will be required to pay a “fee or tax” for placing their reserves in the bank. Since the 2008 crash, economies across the globe have tried to employ different financial tricks to buoy their languishing economies. These tactics included quantitative easing, currency devaluation/printing, and reductions in interest rate. The intent behind these methods was to spur an economic revival. These strategies, despite their burdensome cost on taxpayers, have yielded momentary bliss at best but have not helped the economies escape the abyss. With oil nose-diving and other commodities falling in price, the global economy is bracing itself for a deflationary cycle. Ideally, central banks desire an inflation rate around 2-3% to ensure price and economic stability. Despite attempts, many nations around the world including Japan have failed to achieve this sought after rate. Thus another tool is rolled out; negative interest rates. The intent is to create a disincentive to save. Although sounding a bit oxymoronic and financially imprudent, central banks despise the high savings rate it is currently seeing amongst its business and individual depositors . For now, the Bank of Japan has mainly targeted financial institutions in order to dissuade them from accruing cash. In theory, this “fee” would make the institutions more apt to lend and spend money, which will create the desired inflation and revive the economy.

Foreshadowing a Larger Looming Economic Meltdown

2016 began as an abysmal year for global financial markets. The Chinese stock market is crashing, oil prices are falling to new lows, and it appears the world is entering another recession. Despite the claim by politicians that the global economy was rescued from the brink of collapse, it is all a fata morgana. In reality, the world never fully recovered from the last meltdown. Instead the global approach was to flood the markets with printed currency, using a bandage solution for a larger endemic issue, which is starting to peel off quickly. Even though the Bank of Japan’s measures are limited to financial institutions at this time, if the results are not favorable, expansion of this method can extend to everyone. Negative interest rates are not a new phenomenon; the European Central Bank undertook a similar measure last year in a failed attempt to revive the ailing EU economies . It failed to yield the outcome they desired and some of their member states’ fragile economies are on the brink of collapse today. Italy appears to be one of those nations. Thus to avert a repeat of 2008, Italy has implemented another financial tactic; “bail-in”. The “bail-in” approach will allow the banks to be rescued by levying any losses incurred on large depositors and creditors. Even though the “bail-in” has been relegated to a certain segment of bank depositors at the moment, it could always be extended to all depositors if the situation worsens similar to Cyprus’ financial fiasco .

All these measures are a precursor of what is to come in the global financial system. The unfavorable economic conditions in these countries are symptom of a larger impending economic issue that will affect most of the globe. This financial tactic will not rescue Japan from the upcoming economic recession. As people watch the Japanese implement these financial measures, they should be more apprehensive about what may come to a bank near them in the near future.

About the author:
*Luis Durani
is currently employed in the oil and gas industry. He previously worked in the nuclear energy industry. He has a M.A. in international affairs with a focus on Chinese Foreign Policy and the South China Sea, MBA, M.S. in nuclear engineering, B.S. in mechanical engineer and B.A. in political science. He is also author of “Afghanistan: It’s No Nebraska – How to do Deal with a Tribal State.” Follow him for other articles on Instagram: @Luis_Durani

Source:
This article was published by Modern Diplomacy.

One thought on “Japan: Symptom Of A Larger Financial Crisis? – Analysis

  • February 17, 2016 at 1:31 pm
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    Japan was growing before the 1990s based on exports and huge earnings. The economy was able to create good-pay jobs. That growth and economic expansionary process was caused by the support of US globalized capitalism. The global economy has been changed, and several countries such as China, South Korea, and others have become very competitive rivals to Japan’s exports and earnings. Currently, Japan is facing a decline in corporate earnings, a decline in export revenues, and a deflationary trend. All have culminated in the decline of the rate of profit. This is in fact a severe breakdown to the current imperial system which is fundamentally based on finance, dictatorship of financiers, austerity, and massive wealth polarization. The rest of the people are becoming poorer and poorer. Japan is suffering the same problem, and quantitative easing, a negative interest rate, and bail-in have not worked, because these financial tools concentrate more wealth in the hand of the few, as they loot wealth of depositors to enrich the wealthy few. (Currency war does not work, and Yen depreciation will not help Japan.) For example, who would borrow to invest in an environment that does not generate profits for the investors. Even Keynes, a bourgeois economist and a supporter to capitalism and imperialism and anti-workers, thought that investor compares marginal efficiency of investment against the interest rate when borrowing for investment. The world needs a new system of production and distribution that serves all, because uncertainty has collapsed investment and consumption.

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