Negative Interest Rates: European Experience, Japan Experiment


UBS | The overnight call rate is already running at close to zero after the BOJ introduced negative interest rates, partly due to problems in putting in place the systems, and no consensus view has yet taken shape about the knock-on effect and the impact on the economy or individual sectors. In this report we respond to frequent questions by investors by looking at the impact on the Japanese macro-economy, on investment strategies, and on the banking, real estate and REIT sectors in light of the experience in Europe, which has long had negative interest rates.

Macro-economy, equity strategy: We flag how companies use savings

In Europe, which already has negative interest rates, there was a major impact on the euro but no conspicuous ramifications for lending. In Japan’s case, there may not be much impact on forex, mainly because financial institutions have only limited investments in overseas securities. High corporate savings is a point in common with Europe, and the impact on bank lending will also likely be slight. Rather, passing negative interest rates through to corporate savings could encourage companies to reduce savings. From the equity investment strategy angle, we envisage more active share buybacks as companies seek to use up freshly generated cash. Once this has happened we expect to see greater activity in dividend hikes and business investment through conduits such as M&A.

Banking: diversifying earnings, achieving high shareholder returns is key

The negative interest rate policy is bound to reduce net interest income at just about all banks over the near term, in our view. However, the impact could be minimal at banks with considerable room to lower deposit interest rates. We also think there is little risk of dividend cuts for the time being even at banks heavily affected by lower net interest income. On the other hand, we believe that diversifying earnings and providing high shareholder returns on the back of rich equity capital will be important pre requisites for any bank to achieve high acclaim on a medium to long term view.

Real estate, JREITs: substantial benefits from negative interest rates

Real estate and residential mortgages are benefiting from low interest rates in Europe. In Japan, too, an overall fall in interest rates will reduce the interest burden incurred on real estate investment. However, we could see more selective lending according to the quality of the borrower or of the real estate in question as a result of more stringent risk management. Banks are also likely to increase lending for real estate to cover the decline in earnings caused by the squeeze on interest margins. This is also highly supportive for JREITs thanks mainly to (1) the increased appeal of their relatively high dividend yields, and (2) growth in dividends associated with lower borrowing costs.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.