Japan Is Selling Bonds Guaranteed To Lose You Money | KERA News

Japan Is Selling Bonds Guaranteed To Lose You Money

Feb 9, 2016
Originally published on February 12, 2016 12:57 pm

Japan is venturing further into the terra incognito of negative interest rates, selling a 10-year government bond that actually costs its purchasers money over time.

In doing so, it joins a handful of European countries that have also lowered rates below zero.

The yield on the 10-year note sold by the Bank of Japan dipped to an unprecedented level of negative .05 percent, meaning that anyone who buys it will lose money.

Like other central banks, the Bank of Japan has been steadily lowering interest rates for years in an effort to stimulate the country's economy. It cut rates so much that they eventually fell to zero.

"We all thought that the zero lower bound was as low as things could go. That was as much stimulus as you could put into the economy," said David Blanchflower, professor of economics at Dartmouth and a former member of the Bank of England's Monetary Policy Committee, in an interview with NPR.

But over the past year, central banks in several wealthy countries, including Switzerland, Denmark and Sweden, have decided to experiment by pushing rates below zero. Blanchflower says they hoped this would lower the value of their currencies and make their exports more competitive:

"I just think it's desperation, in the sense that you haven't got [many] weapons left. So what do you do? It's more of a case of, 'Well, let's try this and see, 'cause what else could we do? We've only got one club. We haven't got many weapons left.'"

But why would any investor willingly buy a bond that loses money over time?

With global financial markets in turmoil, investors are evidently willing to pay a price for parking their money in an asset that is widely seen as very safe, says Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics.

"You want the safety of having this particular government bond, and you don't want to run the risk of being in other assets," Kirkegaard says.

For investors like these, keeping the money in cash isn't a good option, Fed Vice Chair Stanley Fischer said last week in a speech before the Council on Foreign Relations:

"It turns out that holding currency is not so easy. If you're going to keep your billion dollars in currency, you're going to have to find a place to store it. You're going to have to pay for that. You're going to have to insure it. And you're going to have to have it guarded."

Kirkegaard says a lot of the investors buying up negative-interest bonds are probably "home buyers," who are reluctant to invest in another currency or foreign financial markets.

Copyright 2017 NPR. To see more, visit http://www.npr.org/.

ARI SHAPIRO, HOST:

Today, the Bank of Japan began doing something that sounds kind of crazy. It's selling a 10-year bond with a negative interest rate. That means instead of collecting interest payments, buyers will actually lose a small amount of money. As the global economy stalls, a handful of wealthy countries are selling bonds like these, and investors are buying them. NPR's Jim Zarroli explains why.

JIM ZARROLI, BYLINE: It might seem counterintuitive that someone would buy a bond that promises to lose you money, but that's what's happening more and more right now. Sweden, Switzerland, Denmark and Japan have all sold debt with interest rates that are slightly negative. Jacob Kirkegaard is a senior fellow at the Peterson Institute for International Economics.

JACOB KIRKEGAARD: If you'd asked me a year ago and said that the Bank of Japan could do this or other central banks or other government, I would have said it would have been impossible.

ZARROLI: The reason this is happening has everything to do with a slowing global economy. Right now, countries like Japan are desperate to find ways to stimulate growth. They want to keep the value of their currencies low so the products they sell are more competitive, and to do that, they want to drive interest rates as low as they can get away with. David Blanchflower is a professor of economics at Dartmouth.

DAVID BLANCHFLOWER: In some sense, this is an opening shot in a currency war. I call it currency skirmishes. But as one cuts and one goes to negative, others do, too.

ZARROLI: Over the past few years, these countries have been driving rates closer and closer to zero, and now, in some cases, they've fallen into negative territory. But why would anyone want to buy a government bond that loses money? Jacob Kirkegaard says that as stocks crash and oil prices plummet, investors are looking for places to put their money. They want to find safe havens like the U.S. dollar and gold, and debt issued by wealthy, stable countries such as Japan and Switzerland is hugely desirable, he says.

KIRKEGAARD: You want the safety of having this particular government bond, and you don't want to run the risk of being in other assets.

ZARROLI: But why put the money anywhere? Why not leave it in cash? Fed vice chairman Stanley Fischer talked about that last week in a speech before the Council on Foreign Relations, and he said essentially that big investors with billions of dollars to spread around can't just stuff it under a mattress.

(SOUNDBITE OF ARCHIVED RECORDING)

STANLEY FISCHER: If you're going to keep your billion dollars in currency, you're going to have to find a place to store it. You're going to have to pay for that. You're going to have to ensure it, and you're going to have to have it guarded.

ZARROLI: All that costs money, so within reason, big investors have shown that they're willing to take a bit of a loss to keep their money in a safe and secure place. So far, U.S. interest rates haven't gone into negative territory, but they are very low and have been falling recently, and if the economy slows too much, they're likely to fall even further. Jim Zarroli, NPR News, New York. Transcript provided by NPR, Copyright NPR.