Barriers to Attaining Economic Virtuous Circle with Negative Interest Rate(Jul 2016)

◆Japan’s Economy after Brexit:A national referendum was held in the UK on June 23rd to determine whether or not the citizens of that country would prefer to withdraw from the EU. The results of the vote found that the majority of citizens choose to leave behind membership in the EU (or “Brexit” as it has come to be known). In this report we provide estimates of the effects of Brexit on Japan’s economy calculated using the DIR short-term macro model. Our conclusion is that, assuming repercussions are in the same class as the global financial crisis of 2008 with falling stock prices, yen appreciation and a shrinking global economy, Japan’s real GDP could drop by as much as 1.11% in comparison to the benchmark.

◆Barriers to attaining economic virtuous circle with negative interest rate:The BOJ made the decision to introduce a negative interest rate in January, but this has yet to produce the desired effect on Japan’s economy – that of triggering a virtuous circle scenario. The reason is that there are three barriers to the effectiveness of the BOJ’s policy. These are (1) turmoil in the global financial markets, (2) weak corporate capex, and (3) worsening of household consumer confidence. As for barrier (1), it would be difficult for the BOJ or the Japanese government to single-handedly cause global market volatility to subside. On the other hand, it can do something about (2) and (3) by responding with appropriate policies. By implementing a sound growth strategy and thereby increasing Japan’s anticipated growth rate, improvement of corporate business sentiment can be expected, along with a subsequent increase in capex spending. Meanwhile, by building a sustainable social security system, the government can remove the sense of uncertainty on the part of households regarding the future, and by doing so can also revitalize personal consumption.