This might be the Jedi mind trick Japan was looking for.
Markets, at least, sure seemed to think so. Japanese stocks surged almost 3 percent and the yen was down about 1.5 percent, which helps exporters, on the news that the country's central bank had done something it had never done before. That's cutting interest rates into negative territory. Instead of paying banks 0.1 percent on any deposits they have with it, the banks will have to pay the central bank a 0.1 percent penalty for the privilege of holding their money there. Or will they? If you read the fine print, it turns out that this negative interest rate barely applies to anything at all. So in a way, it's almost about tricking markets into thinking that it's doing more than it actually is.
And it's kind of working.
Before we get to that, though, why is Japan even doing this? After all, it's already printing a lot of money and its economy is already doing a lot better. Unemployment is down to a minuscule 3.3 percent, and for the good reason that more people are both finding and looking for jobs. So what's the problem? The answer is that Japan still hasn't done the one thing it really wanted to do: get inflation back up to a healthy amount. Sure, the economy is doing well today, but it might not keep doing well tomorrow if prices start falling again, like they did for most of the past 20 years. (That's because lower price lead to lower wages, which makes it harder to pay back debts that don't get any lower). And just as important, a little more inflation would make its debt, which has swollen to 230 percent the size of its economy, a little more manageable.
Negative interest rates really should do the trick. The idea is that banks would either lend out their money or move it out of the country rather than lose even a small fraction of it by keeping it at the central bank. Although if we're being honest, it's really that second part that matters. It's not like banks haven't been lending because they could earn 0.1 percent by not doing so. They weren't lending because they don't see a lot of good opportunities out there—which isn't going to change if they have to pay the central bank a little instead of getting paid a little by it. But that doesn't really matter. Just getting people to move their money out of the country is enough. That should weaken the currency, and, in turn, increase inflation. That's why the eurozone, Denmark, Sweden, and Switzerland have all used negative interest rates of their own.
And, as you can see below, that's exactly what happened when Japan announced its negative interest rates on Friday. The yen tumbled, briefly rallied, and then tumbled some more, down to 121 per dollar.
The funny thing, though, is that Japan kind of didn't cut interest rates into negative territory, not really. How is that possible? Well, the negative interest rate won't apply to the $2.5 trillion worth of excess reserves that Japanese banks already have, but only to new ones. So it didn't change anything today and will scarcely change things tomorrow. But despite that, the yen still fell quite a bit. Why? Think about it like this. Japan's central bank basically did nothing, but did it in a way that looks like it's willing to do something in the future. In other words, it's about the message it sends—that they haven't given up and are willing to try new things—more than anything else.
Or, if you like, it's a Jedi mind trick. Japan's central bank is telling us that it's doing more without actually doing more to try to get us to act as if it's really doing more—which we did!
This is the devaluation they're looking for.