Negative Rates Undramatic

The central bank governor behind one of the world’s biggest experiments with negative rates has declared their introduction “undramatic” even as many economists expect further cuts.

Stefan Ingves, head of Sweden’s Riksbank said that a main interest rate of minus 0.5% had caused few problems for banks while the economy has boomed, news outlets reported.

“It has been undramatic. Clearly, the various worries that have been aired in different parts of the world have not materialized,” he said.

But with a debate raging about the impact of negative deposit rates in the eurozone on lenders such as Deutsche Bank, Ingves underscored how Sweden’s banks had few bad loans and good profitability. Lenders have refrained from passing on negative rates to the general public or small businesses but have made the largest companies—which themselves may be able to borrow below zero in the bond markets—pay to deposit money.

The actions of the world’s oldest central bank have been under intense scrutiny in recent years. The Riksbank was among the first central banks to raise rates after the financial crisis in 2010-11, only to have to reverse that later and become one of the pioneers of negative rates. The European Central Bank and Bank of Japan have since followed the path of Sweden, Denmark and Switzerland.

Economists at Nordea, the biggest bank in the Nordics, think the Riksbank will have to cut rates deeper into negative territory and boost its purchases of government debt after the inflation rate has fallen in recent months.

“The Riksbank’s toolbox is getting empty and it is far from certain that any further stimuli measures will be effective. Nevertheless, we expect the Riksbank to come up with more,” said the Nordea economists.

 Japan’s Unintended Victim

Japan’s leasing sector—a critical source of massive annual investment to millions of companies—risks becoming an unintended victim of the country’s negative interest rate policy even as the central bank tries to stimulate the economy.

A sharp drop in pricing power, say analysts, dents a segment of the economy that provides a vast range of critical equipment to small- and medium-sized companies—a group that represents 99.7% of all Japanese companies and employs around 70% of the workforce.

But as a bellwether industry—whose business lines cover tens of thousands of products ranging from solar panels and precision measuring equipment to cement mixers and office chairs—leasing is leading a broader decline in what one economist describes as a “worrisome” fall in inflation expectations in the services industry.

“While the Bank of Japan can blame the stronger yen for a sharp fall in goods inflation, the ongoing slowdown in services inflation and the drop in inflation expectations highlight that the benefits of its aggressive policy easing are increasingly elusive,” says Marcel Thieliant of Capital Economics.

Beyond waning pricing power, leasing companies are also suffering harsher trading conditions. According to the Japan Leasing Association, ¥4.7 trillion ($45 billion)—or some 7% of Japan’s private sector capital investment in the 2015 financial year—was made through leasing. But in August, the most recent month for which data is available, leasing transaction volume sank 10.6% year on year. Excluding the real estate and solar segments, says Taichi Noda at Goldman Sachs, the real growth rate contracted by about 2%.

The fall in leasing companies’ pricing power might have hurt their businesses, but in theory also should have encouraged customers to increase spending.

It is also not what was expected when the leasers discovered that the policy could significantly cut their funding costs. It was no coincidence that it was a leasing group, Sumitomo Mitsui Finance and Leasing, that in March became the first Japanese company to issue ¥5 billion of commercial paper with a negative interest rate, of -0.001%.

Instead, the leasing sector appears to be suffering from a flattening of the Japanese government bond yield curve, a series of moves that culminated over the summer in about 80% of Japan’s sovereign debt trading at sub-zero levels.