17 years ago (on February 2nd 1999), the Bank of Japan officially adopted its zero interest rate policy (ZIRP) in an attempt to fight off deflation. It would be a slight understatement to say that it didn’t really work. The economic funk continued and in 2001, the Japanese resorted to quantitative easing (QE): printing electronic money to buy government bonds in an attempt to boost demand in the economy and hence lift inflation.


When the global financial crisis broke, central banks in the UK, Europe and US took inspiration from Japan and adopted QE programmes of their own. QE was enthusiastically embraced in the US and UK, and more reluctantly in the Eurozone. However, in Europe, the European Central Bank (ECB) has been forced to go even further. ZIRP gave way to NIRP (negative interest rate policy) in the pursuit of ever more monetary stimulus.

the policy cupboard is rarely bare

Now it is Japan’s turn to borrow from the West. Having long insisted that it was impossible, the Japanese have now adopted NIRP of their own (arguing that they have learnt from the European experience). Japan’s banks now have to pay 0.1% for the privilege of lending to the Bank of Japan.


The impact on the global bond market is fairly profound as shown in the chart below. Prior to July 2014, there was no corner of the global government bond market in which you could find negative short-term interest rates. Today, NIRP afflicts nearly 50% of the market.

Chart showing the impact of negative interest rates on global bond markets

It is easy to be cynical about the chance of success, but it is another good reminder that the policy cupboard is rarely bare. Even when it seems that all options are exhausted, there are other tools to be deployed. If in doubt, go back to the playbook in Ben Bernanke’s speech from 2002. There is no guarantee that these tools will work quickly, but central banks will undoubtedly keep experimenting.


Moreover, in a era of record high government debt, NIRP incentivises investors to continue holding government bonds despite paltry yields.


Financial repression, and the global search for yield, continues…