Negative Interest Rates: Blessing or Pain for real long term Investors.

Negative Interest Rates: Blessing or Pain for real long term Investors.

There were plenty of warning signs that the Bank of Japan’s policy of negative interest rates was doomed and the world over the new phenomenal of negative interest rates really been questioned. 

The first sign was a rise in the yen in January, when the policy was introduced. It was both unexpected and unwanted since a handful of exporters such as Toyota, which benefit from a cheap currency, have been a significant source of growth for decades.

Then there were also sounds of distress from Government Pension Investment Fund , the Japanese pension fund, and Japan Postal Savings. They feared that the prices of financial assets were increasingly artificial thanks to central bank policies. Invest today and lose tomorrow when the stimulus policies cease or reverse.

By April, there was a lot of criticism from number of quarters. In the month of September the central bank announced a review of its actions, which culminated in its decision not to push interest rates further into negative territory.

Across all markets that central banks have been engaged in unconventional monetary policies, there have been many victims in the financial community. They include pension funds, insurers and asset managers, as well as ordinary households hoping to earn something on their savings but that don’t have access to the leveraged opportunities of the wealthy. Yet it was not until the banks started feeling the pain that central banks seemed to reconsider.

It is interesting, albeit somewhat puzzling, to note banks clout, which contrasts markedly with that of others in finance. And the muscle of banks persists, despite them mattering less and less.

Especially in Japan, banks still depend on the gap between the short term rates at which they borrow and the long term rates at which they lend for their profits. The Bank of Japan’s latest measures, are intended to steepen the yield curve and address banks’ anxieties about their after tax profits. That is especially true of Japan’s many smaller regional banks the shares of which foreign fund managers are now shorting due to the current interest rate scenario.

There is a similar dynamic elsewhere. Virtually all those who have been hit by central bank policies have, eight years after the crisis that gave rise to them, been reluctant to point out that they have proved ineffective and costly.

One of the few larger investors to speak out and destroy the myths has been Swiss Re. Indeed, 18 months ago it attempted to quantify the costs in foregone income to both US savers and European insurers as a result of the respective central bank policies on both sides of the Atlantic.

That is why earnings of US insurers have dropped well in advance before those of the banks. One such example is Metropolitan Life warned in its most recent quarterly results that it needed to bolster its reserves by $2bn largely because of a squeeze from low interest rates. Many research reports by leading brokerage houses have mentioned that low growth and low rates weigh on active manager performance.

In the US, one reason insurers are so reluctant to criticize the policies of the Federal Reserve, is that the insurance industry currently falls under the purview of local state regulators and they fear above all else coming under the much more critical eye of a national regulator such as the Fed, hence would prefer to refrain to comment on the policy as such. But in reality the plight of their clients, average Americans, continues to worsen, and as they age, their standard of living will drop further.

There by now making it impossible for retirees to ensure quality of life and others to save for secure retirement through the deposit and investment options suitable for and available to low/modest income households.  Current income distribution distortions are thus likely only to get worse faster as savings fall into ever deeper holes. Contemplate rising inflation without rising savings returns and be particularly afraid and leading to further problems.

_Farzan Ghadially