Japan’s low interest FDI: Boon or curse

04-Jun-2016 10:38 am 0

Japan recently introduced negative interest rates. That means that if you give your money to banks, they’ll return you even lesser than your principal amount. It may sound crazy but it had been done by some Europe’s Central banks as well. This idea would’ve been considered ludicrous before the 2008 recession. But now countries are ready to go as far as it takes to avoid a scenario as devastating as that. But what was so problematic with japan economy that banks had to take this step? And how does it affect India? 

The problem with Japan’s economy– The common answer goes that the interest rates are already very low, so what can the banks do? The government has a severe fiscal problem, so increasing spending or cutting taxes is out of the question. There’s nothing to be done except pursue structural reforms and hope for an eventual turnaround. But here is the catch; banks can always do something.

What should the banks do?

Easy solution-PRINT MONEY. If the problem is that people don’t spend enough then increase the money in circulation. Moreover, it’s the money that is moving that counts and if it exceeds the production, increases inflation. So, the predicament of inflation with printing more money doesn’t arise in Japan’s case.

The long term solution

There is a problem at the structural level too and it’s not the supply, but the demand. Either the people are really contended or very afraid to spend. The majority of Japanese spend unusually small part of their income. They just store the rest. This creates stagnation. Now, as long as money is moving it’s easy to steer, but when people start storing much of it, the problem becomes prominent as the investors have to invest huge chunks of money so that the return is still high.

The negative interest rates

Printing money is a temporary solution because all men must die, even misers, so the money will eventually come into circulation so inflation will be waiting around the corner to slap the new generation. So, structural reforms are necessary. The government needs to encourage people to spend and invest more money and take steps that make them store less. Thus, negative interest rates! Now, unlike every other country, Japanese banks will charge if you want to save money. So, what will people do? They’ll still save. But, at least some percent of the population wouldn’t mind investing. But where to invest? There’s no better option other than India.

India, the land where even exceptions are born in millions. And the current government is ambitious. They have many plans and looks like they’ll get the money for their plans from one place or the other. But India still needs a lot. Just to expand roadways, India will need ₹5 lakh crore in the next 5 years. Japan comes to the rescue. They have loaned India ₹80,000 crore for India’s bullet train network which comes with a repayment period of 50 years and with an interest rate of as low as 0.1 percent. This interest is still greater than negative and enough to lure the companies and even locals to invest. Japan has also decided to invest ₹2 lakh crore at 1% interest rates.

The Japanese economic problem and the steps by their government are a blessing to India and it’s development’s needs. Japan wants their people and companies to change their mindsets. They want them to spend more. If that is not easy, first they want them to at least start investing more. India on the other hand, has many plans. Plans need money to execute. Money with the least burden for the future generations. If executed properly, it’ll be a classic example of inclusive growth for both parties and the FDI is definitely a boon for the Indian economy.

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Japan’s low interest FDI: Boon or curse
Japan recently introduced negative interest rates. That means that if you give your money to banks, they’ll return you even lesser than your principal amount.

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