The Implications Of Ultra-Low And Negative Interest Rates .

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The Implications of Ultra-Low and Negative Interest Rates for AsiaAbout the Asian Development Bank InstituteThe Asian Development Bank Institute, located in Tokyo, is the think tank of the AsianDevelopment Bank. The institute aims to identify effective strategies to improvepolicy and development management in Asia and the Pacific. We work with anextensive network of partners in the region and globally to influence policies on povertyreduction, inclusive growth, the environment, regional cooperation, infrastructuredevelopment, middle-income countries, and private sector development.ASIAN DEVELOPMENT BANK INSTITUTE3-2-5 Kasumigaseki, Chiyoda-kuTokyo, 100-6008 JapanTel 81 3 3593 5500Fax 81 3 3593 5587www.adbi.orgYoshino Chantapacdepong AngrickISBN978-4-89974-095-7ISBN489974095-6The Implications of Ultra-Low andNegative Interest Rates for AsiaNew Approaches to Overcoming Market FailuresTwenty years after the East Asian financial crisis, Asia is facing challenges as advancedeconomies implement unprecedented low and negative interest rate policies tojumpstart moribund economies and avoid deflation. As the longer ends of yield curvesin many advanced economies plunge into negative territory, fears are growing thatthese policies may create unintended side effects, including cash hoarding, housingbubbles, and damage to banks’ balance sheets. It has long been argued that Asianfinancial markets are influenced more by the monetary policies of advanced economiesthan their own, so Asia may be affected disproportionally by volatile swings ofcurrencies, international capital flows, and debt levels.The Implications ofUltra-Low and NegativeInterest Rates for AsiaEdited byNaoyuki YoshinoPornpinun ChantapacdepongStefan Angrick9 784899 740957ASIAN DEVELOPMENT BANK INSTITUTE

The Implications ofUltra-Low and NegativeInterest Rates for AsiaEdited byNaoyuki YoshinoPornpinun ChantapacdepongStefan AngrickASIAN DEVELOPMENT BANK INSTITUTE

2018 Asian Development Bank InstituteAll rights reserved.First printed in 2018.ISBN 978-4-89974-095-7 (Print)ISBN 978-4-89974-096-4 (PDF)The views in this publication do not necessarily reflect the views and policies of theAsian Development Bank Institute (ADBI), its Advisory Council, ADB’s Board orGovernors, or the governments of ADB members. The responsibility for opinionsexpressed in signed chapters rests solely with their authors, and publication doesnot constitute an endorsement by ADBI, other international organizations andsecretariats which employ the authors, or their respective Board of Governors or thegovernments they represent, or their member countries or economies, of the opinionsexpressed in them.ADBI does not guarantee the accuracy of the data included in this publication andaccepts no responsibility for any consequence of their use. ADBI uses proper ADBmember names and abbreviations throughout and any variation or inaccuracy,including in citations and references, should be read as referring to the correct name.By making any designation of or reference to a particular territory or geographicarea, or by using the term “recognize,” “country,” or other geographical names in thispublication, ADBI does not intend to make any judgments as to the legal or otherstatus of any territory or area.Users are restricted from reselling, redistributing, or creating derivative works withoutthe express, written consent of ADBI.ADB recognizes “China” as the People’s Republic of China.Note: In this publication, “ ” refers to US dollars.The Asian Development Bank Institute, located in Tokyo, is the think tank of the AsianDevelopment Bank. The institute aims to identify effective strategies to improve policyand development management in Asia and the Pacific. We work with an extensivenetwork of partners in the region and globally to influence policies on povertyreduction, inclusive growth, the environment, regional cooperation, infrastructuredevelopment, middle-income countries, and private sector development.

ContentsFigures vAbbreviations viii1.Introduction About the Editors 2. Opening Remarks and Keynote Speeches A. Opening Remarks by Naoyuki Yoshino B. Keynote Speech by Narayana Kocherlakota C. Open Floor Discussion 3. Distinguished Speaker Session I:Negative Interest Rates in Advanced Economies A. Jean-Pierre Danthine: Negative Interest Ratesin Switzerland—What Have We Learned? B. Cecilia Skingsley: Negative Interest Ratesin Advanced Economies C. Sayuri Shirai: An Overview of the Bank of Japan’sNegative Interest Rate Policy Experience D. Luc Laeven: Negative Rates and Bank Profitability E. Open Floor Discussion 4. Distinguished Speaker Session II:Implications of Ultra-Low and Negative Interest Ratesfor Monetary Policy and Macroprudential Policy in Asia A. Veerathai Santiprabhob: The Side Effects of Ultra-Lowand Negative Interest Rates in Asia and TheirImplications for Emerging Market Economies B. Joon-Ho Hahm: Implications of Ultra-Low and NegativeInterest Rate Policies for Monetary Policyand Macroprudential Policy in the Republic of Korea C. Hans Genberg: Implications of Ultra-Low and NegativeInterest Rates for Monetary Policy and MacroprudentialPolicy in Asia D. Dong He: “Low for Long” and Market Liquidity E. Open Floor Discussion 1455612151521283647515156667683iii

ivContents5. Distinguished Speaker Session III:The Implications of Ultra-Low and Negative InterestRates for Financial Markets in Asia A. Michael Hutchison: Effects of Ultra-Low and NegativeInterest Rates on Asian Financial Markets B. Robert McCauley: Effects of Low or Negative PolicyRates on Asian Financial Markets C. Tamim Bayoumi: Implications of Low (Rising?)Interest Rates for Asia D. Alicia Garcia-Herrero: Japanese Investors’ Reactionto the Low Interest Rate Environment—Some Takeaways for Emerging Asia E. Open Floor Discussion 8686951071131236. Concluding Remarks 128References 132

27282930313233The Swiss Franc–Euro Interest Rate Differential The Consequence: A Massively Overvalued Currency Swiss Confederation Bond Yields Bank Lending Rates: New Loan Agreements Mortgage and Investment Loan Rates Swedish Monetary Policy: Repo Rate Pathand Quantitative Easing Transmission Analysis of the Effective Lower Bound Market Rates, Lending Rates, and Deposit Rates Foreign Exchange Trade-Weighted, Outcome, and Forecasts Lending to Households and Companies Return on Equity: Swedish and European Banks Result: Inflation and Inflation Expectations Extraordinary Monetary Easing(Asset/Gross Domestic Product) The Bank of Japan’s Monetary Easing since 2013 Three-Tier System of the Reserves Deposit and Loan Growth Eurosystem Asset Purchases Euro Area Banks: Interest Rates on New Loans and Deposits Euro Area Large Banks: Net Interest Margin Further Decline in Lending Rates Continuesto Depress Loan–Deposit Margins Euro Area Large Banks: Aggregate Net Income Lending to the Private Sector United States Banks: Increase in Net Income (United States) United States Banks: Net Interest Margins by Type of Bank Commercial Banks’ Holdings of Treasury and AgencySecurities and Effective Federal Funds Rate (United States) Japan Equity Market Developments Cross-Border Transmission Channels Macroeconomic Implications Responses of Macrovariables to Increase in SecuritiesHeld by Advanced Developed Economy Central Banks Macroprudential Policies in the Republic of Korea Portfolio Investment and Long-Term Interest Rates I Portfolio Investment and Long-Term Interest Rates II External Borrowing by Nonfinancial Corporates 4557585961626467v

58596061626364FiguresInternational Debt Securities Issued by NonfinancialCompanies Outstanding in Foreign Currenciesby Residence and by Nationality Borrowing by Nonfinancial Corporates in Emerging Markets Jittery Financial Markets I Jittery Financial Markets II The Use of Macroprudential Policies The Use of Capital Flow Management Policies Some Tightening of Capital Controls Foreign Currency Debt as a Percentage of Total Debt What Is Market Liquidity? Drivers of Market Liquidity and Its Resilience Monetary Policy and Scarcity Effects Nonbank Finance Has Been Growing Liquidity Risks in the Asset-Management Industry Mutual Funds and Concentrated OwnershipAre Associated with Decreased Liquidity Resilience Falling Interest Rates and Japanese Yen Depreciation Some Declines in Money Market Rates Large Declines in Corporate Bond Yields in AsianEmerging Markets Mixed Developments in Exchange Rates Net Nonresident Purchases of Emerging Market Stocksand Bonds, Debt and Equity Combined Net Nonresident Purchases of Emerging Market Stocksand Bonds, Debt and Equity Separate Institute of International Finance Tracker: Total PortfolioFlows into Emerging Markets Total Portfolio Investment Flows to Emerging Economies Nonresident Portfolio Debt Inflows to Emerging Markets,by Region Nonresident Portfolio Equity Inflows to Emerging Markets,by Region Bank of Japan Quantitative and Qualitative MonetaryEasing/Negative Rates and Asian Financial Markets Japanese and Euro Area Purchases of Foreign Bonds The Term Premium and United States Dollar BondIssuance by Non-United States Borrowers Foreign Ownership of Asian Local CurrencyGovernment Bonds Banks’ and Insurers’ Hedging Pressures Monetary Policy Announcements and Currency Basis Sources of Currency Hedging Demandand the Japanese Yen/United States Dollar Basis 97989899100101

6Foreign Bank Claims on the Japanese Public Sectorand Foreign Exchange Basis United States Dollar Liabilities of Non-United StatesBanks: All-Time High Bank of Japan Quantitative Easing/Negative Ratesand Asian Financial Markets Japanese Bank Share of Foreign Claims on the Asiaand Pacific Region I Japanese Bank Share of Foreign Claims on the Asiaand Pacific Region II Japanese Bank Share of Foreign Claims on the Asiaand Pacific Region III Japanese Bank Share of Foreign Claims on the Asiaand Pacific Region IV Bank of Japan Quantitative and Qualitative Easing/Negative Rates and Asian Financial Markets Daily Correlations to the United States 10-Year Rate Portfolio Flows between Japan and the Rest of the World Preferred Destinations for Japanese Portfolio Outflows,Outside of Emerging Asia Main Destinations of Outflows to Asia Interest Rate Differentials between Local Economyand Japan Interest Rate Differentials and Expected Exchange RateAppreciation in Relation to Japan Profitability of Japanese Banks Japanese Overseas Investments, Bank Loans Japanese Banks Cross-Border Lending Abroad Japanese Banks’ Cross-Border Lending into EmergingMarket Asia Japan Overseas Funding Asset Allocation Plans for Pension Funds Global Equity Allocations by Region for Japan andthe Republic of Korea Returns by Pension Funds 8118119120121121122

AbbreviationsADBIAsian Development Bank InstituteBISBank for International SettlementsBOJBank of JapanCPIconsumer price indexDodd–Frank Act Dodd–Frank Wall Street Reform and ConsumerProtection Act of 2010ECBEuropean Central BankETFexchange-traded fundFedFederal Reserve SystemFRB Board of Governors of the FederalReserve SystemGDPgross domestic productGPIFGovernment Pension Investment FundIMFInternational Monetary FundJGBJapanese government bondLIBORLondon interbank offered rateLTVloan-to-valueNPSNational Pension ServicePRCPeople’s Republic of ChinaROEreturn on equityUS(the) United StatesVARvector autoregressiveviii

1IntroductionThe introduction of negative interest rates across Europe and Japan from2014 to 2016 has been a major event in the world of international centralbanking. Introduced as an instrument to ease financial conditions andstimulate inflation, negative interest rates have received a great deal ofattention and have generated an equally large amount of debate. Whilesome have argued that negative interest rates are a logical extension ofexisting monetary policies, others have pointed out the financial stabilityrisks associated with negative interest rates. Recent debate has focusedon ways to maximize economic growth while minimizing risk, but thecross-border effects of negative interest rates, particularly for emergingeconomies, have received less attention.This edited volume brings together an international group ofscholars, policy makers, and financial market practitioners to explorethe effect of ultra-low and negative interest rates on Asia. As one of themost dynamic and open regions in the world, Asia has been uniquelyaffected by low and negative global interest rates. From foreign directinvestment and portfolio investment to exchange rate effects and creditavailability, financial conditions in advanced economies can directly orindirectly affect regional economies in important ways.The contributions in this volume were originally presented at theAsian Development Bank Institute’s (ADBI) Annual Conference 2016.While negative interest rate policies were still comparatively new atthe time of the conference, many of the conclusions and predictionspresented by the speakers in Tokyo in December 2016 hold up remarkablywell and provide unparalleled insights into the economic and financiallinks between Asia and the rest of the world.In their opening remarks for the conference, Naoyuki Yoshino andNarayana Kocherlakota draw attention to the relationship betweennegative interest rate policies and broader macroeconomic trendsaround the world. Yoshino argues that monetary policy may be lesseffective where a large share of the population comprises elderly people.Kocherlakota then stresses how financial crises create uncertainty andfear in the post-crisis period, suggesting these as factors behind slowconsumption growth in much of the advanced world.1

2The Implications of Ultra-Low and Negative Interest Rates for AsiaDistinguished Speaker Session I explores negative interest ratesin advanced economies. Renowned experts from the economies thathave adopted negative rates explain the specific economic conditionswhich motivated negative interest rate policies, as well as their goals.Jean-Pierre Danthine explains what motivated negative interest policiesin the specific structural context of the Swiss economy. Cecilia Skingsleyillustrates the Swedish case, drawing attention to the internationallinkages between Europe, Sweden, and the rest of the world. SayuriShirai addresses negative interest rates in Japan, highlighting linkageswith financial markets more broadly. Finally, Luc Laeven explains theimplementation of negative interest rates in the euro area, stressingvarious concerns and dynamics unique to the European Monetary Union.All four experts agree on the necessity for appropriate communicationof the policy, its goals, and the methods of implementation.Distinguished Speaker Session II addresses the implicationsof ultra-low and negative interest rates for monetary policy andmacroprudential policy in Asia. Veerathai Santiprabhob starts off thediscussion by addressing the potential side effects of low and negativerates for emerging market economies, such as Thailand, giving particularemphasis to the risks low and negative rates pose for financial stabilityand monetary policy transmission. Joon-Ho Ham also stresses theseconcerns in his summary of the case of the Republic of Korea, suggestingmacroprudential policy as a first line of defense while acknowledgingthe difficulty of achieving several different objectives with a limited setof tools. Hans Genberg expands the discussion to other Asian economies,especially Indonesia, Malaysia, and the Philippines, drawing attention tothe high degree of integration of Asia with the world, which also implieshigh exposure to risks. Reflecting upon the effect of negative interestrate policies from a more global perspective, Dong He contextualizesthese considerations against the background of global United States(US) dollar funding. He draws attention to different forms of liquidityand how those relate to policy making and market functioning.Finally, Distinguished Speaker Session III takes a financial point ofview and explores the implications of ultra-low and negative interestrates for financial markets in Asia. Michael Hutchison examinesthe transmission channels of negative rates and draws attention topossible adverse interaction between households’ intertemporal budgetoptimization and policy objectives as well as the challenges facedby central banks in simultaneously addressing potentially excessivesaving and borrowing. Robert McCauley continues the discussion byproviding an intriguing illustration of how low and negative rates inJapan drive the cross-border investment behavior of Japanese banksthat simultaneously lowers investment returns and pushes up the

Introduction3costs of hedging through swaps. Tamim Bayoumi then reflects uponthe future path of interest rates in the US, highlights several key areaswhere correlations between economies in Asia and the US have changedand points out potential risks arising from increasing US rates. Finally,Alicia Garcia-Herrero analyzes how the investment portfolios of privateand public investors have changed across Asia in response to low andnegative rates, emphasizing the behavior of sovereign investors fromJapan and the Republic of Korea.The final section of this volume reflects upon these contributions,highlights several key issues that were brought up, and draws someoverarching conclusions. We also evaluate what lessons negativeinterest rates hold for economic theory and reflect upon the future ofnegative interest rates.ADBI’s mission is to provide intellectual input for policy makersin the developing member countries of the Asian Development Bank.This volume and ADBI’s Annual Conference 2016 directly contributeto this goal by highlighting the important macroeconomic and financiallinkages that exist between Asia and the rest of the world and the lessonsthat Asia’s experience holds for economists. We encourage readers tocontinue following ADBI for state-of-the-art research on the policyquestions facing Asia and we invite them to visit ADBI’s website forpresentation slides, papers, and video recordings of ADBI’s conferences(ADBI, ADBI Annual Conference 2016).Finally, we ask readers to note that the views expressed in thisvolume are those of the speakers and not those of ADBI or the institutionsthe speakers are, or have been, affiliated with.Naoyuki YoshinoDean, ADBI, and Professor Emeritus, Keio UniversityPornpinun ChantapacdepongAssistant Director, Monetary Policy Group, Bank of Thailand,and former Research Fellow, ADBIStefan AngrickResearch Associate, ADBI

4The Implications of Ultra-Low and Negative Interest Rates for AsiaAbout the EditorsNaoyuki Yoshino is dean of the ADBI, chief adviser at the Japan FinancialServices Agency’s Financial Research Center, chair of the Meeting ofJapanese Government Bond Investors, and professor emeritus of KeioUniversity. He chaired the Financial Planning Standards Board, theJapanese Ministry of Finance Council on Foreign Exchange, and theFiscal System Council. He was a board member of the Deposit InsuranceCorporation of Japan and president of Japan’s Financial System Council.He obtained his PhD from Johns Hopkins University. He holds honorarydoctorates from the University of Gothenburg and Martin LutherUniversity of Halle-Wittenberg.Pornpinun Chantapacdepong is an assistant director at the Balance ofPayment Analysis Division, Economic and Policy Department, MonetaryPolicy Group, Bank of Thailand. She was a research fellow at the ADBIduring March 2015–March 2017. She specializes in monetary policy,exchange rate policy, international capital flows, volatility in asset prices,and central bank balance sheets. She holds economics degrees fromThammasat University (BA), the University of

The Implications of Ultra-Low and Negative Interest Rates for Asia The Implications of Ultra-Low and Negative Interest Rates for Asia New Approaches to Overcoming Market Failures Twenty years after the East Asian financial crisis, Asia is facing challenges as advanced economies implement unprecedented low and negative interest rate policies to

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