Question

In early 2016 as the Bank of Japan began to push policy interest rates negative, there was a sharp increase in sales for homes in Japan. Why might this be, and what does it mean for the effectiveness of negative interest rate policy

Short answer

Negative rates lower the entire yield curve and narrow the margin financial institutions earn from lending.

Step-by-step solution

Concept Introduction

Several central banks cut interest rates to near-zero to combat the global financial crisis sparked by the fall of Lehman Brothers in 2008. Interest rates have remained low in most countries a decade later due to slow economic growth.

With little room to cut rates further, some major central banks have turned to unconventional policy measures, such as a negative interest rate policy.

Financial institutions are compelled to spend interest for depositing excess reserves with the central bank under a negative rate policy. The financial institutions' are penalized by the central banks in this way for hoarding cash in the hopes of incentivizing them to lend more.

Explanation

In January 2016, the Bank of Japan (BOJ) adopted a negative interest rate, primarily to prevent an unfavorable yen point from harming an export-dependent economy. It seeks 0.1 percent interest on a portion of surplus reserves held by banks with the BOJ. Aside from cutting borrowing costs, proponents of negative rates argue that they help weaken a country's money rate by making it a less appealing investment than other currencies.

Weaker currency benefits a country's exports while also raising inflation by increasing import costs. Negative interest rates impose downward pressure on the entire yield curve, reducing the profit margins earned by financial firms.

If the economy is harmed by negative interest rate , financial institutions may refrain from lending, causing the economy to suffer.

Even while there are limits to how far central banks can push rates into negative territory, depositors can avoid receiving negative interest rates on their bank savings by opting for actual cash instead. The BOJ uses a tiered approach, charging 0.1 percent interest on just a portion of the excess reserves that financial firms deposit with the central bank.

Final answer

Because negative interest rates exert decline on the entire yield curve and limit the margin financial institutions receive from lending, there was a sharp increase in home sales in Japan in early 2016, as the Bank of Japan began to push policy interest rates negatively.