Perspective #5: The Japan Shockwave

"Dear Curious Investor,?

A foreign country has once again shocked our markets. It’s Japan this time (for a change). ?? The same country that we were rumored to surpass in terms of GDP to become the world’s fourth-largest economy for a brief second. Well, Japan continues to be the fourth-largest economy for now and has done something that sent shivers across the world to all markets and economies.?

It just increased interest rates. I am sure you know about it after the 2.68% crash we saw one fine Monday morning in early August ?? and because it’s been in the news a lot (obviously). Oh, and Divam shared his opinions about the crash last week; join the WhatsApp channel here to find the note.?

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So, what’s happening??

Japan is known to be the epicenter of a lot of earthquakes, and this time, it has triggered an economic quake ???, and tremors are being felt by the entire global economy. The Bank of Japan increased the interest rates in the country for the first time in 17 years, to 0.1%. No, I’m not joking; it really is just 0.1%, but what matters here is the change and not the absolute number. Here’s what interest rates in Japan have looked like for the last couple of decades.?

Yes, you did just see negative interest rates here. What does this mean? This means that in order to put money in your bank account??, you need to pay the bank a charge often called the storage charge because:

• The bank is keeping your money safe by storing it, and?
• Banks and the government do not want you to put your money in your bank account, and they are punishing you for doing that.

So, the Japanese government has been asking its citizens not to save and instead splurge away their money ???, but the citizens just are not ready to do that. Thus, BoJ (i.e., Bank of Japan) kept the interest rates very low and even negative to encourage its people to spend more. Has it worked? Nope!

Consumers have been so stringent in their ways that Japan went into deflation. Look at all the years below the 0% line in the chart below."

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