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Japan's Deflation and the Feasibility of Negative Interest Rates

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  • Stephen J. Davies

    (Kobe University)

Abstract

Japan's central economic problem is that interest rates are much too high, so that aggregate demand is too low. gStructural reforms h will increase supply but not deal with the shortage of demand. It is generally assumed that ginterest rates cannot be negative" and that therefore alternative techniques have to be used to ease monetary policy when interest rates are already close to zero. This paper discusses three existing ideas for achieving negative interest rates: Gesell's "stamp scrip" and two recent proposals. It argues that negative interest rates can be achieved without the cost involved in these existing proposals. All that is needed is to break the link between cash and the unit of account: a 1,000-yen note would no longer be worth 1,000 yen. Alternatively, cash can be replaced with electronic legal tender, subject to a negative interest rate.

Suggested Citation

  • Stephen J. Davies, 2003. "Japan's Deflation and the Feasibility of Negative Interest Rates," Kobe Economic & Business Review, Research Institute for Economics & Business Administration, Kobe University, vol. 47, pages 93-115, February.
    • Handle: RePEc:kob:review:feb2003::v:47:p:93-115
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    More about this item

    Keywords

    deflation; negative interest rates;

    JEL classification:

    • B59 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Other
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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