The news that the Bank of Japan has become the last central bank to abandon the use of negative interest rates (“Bank of Japan ends era of negative interest rates”, Report, March 20) is surely the final nail in the coffin for the zero-interest rate policy (ZIRP). Its passing should be a cause for relief.
The era of unsustainably low cost of capital prevailed far longer than anticipated, and has had effects with which we are still coming to grips. Firms only just able to keep up interest payments on their debt — when rates are held at artificially low levels — are correctly termed “zombies”. These are not the firms that are going to be driving future growth.
Moreover, unsustainably low-cost capital is a key factor, if an under-appreciated one, suppressing productivity across the western world.
The shift to higher rates is undoubtedly causing ongoing turmoil. It has meant business plans being rewritten and moderately productive investments often abandoned.
But in an era when we are rightly focused on sustainability, financial sustainability also has to be a key consideration.
Money must be used prudently. It is not infinite and should have a cost which encourages careful use — that is the route to sustainable economic growth in the future.
As we try to lay the foundations for such growth, that is surely no bad thing.
James Sproule
Chief Economist, Handelsbanken UK
London E1, UK
This post was originally published on Financial Times
