Will Low Interest Rates Eventually Boost Corporate Risk...

Will Low Interest Rates Eventually Boost Corporate Risk-Taking? The intellectual foundation for cutting central bank policy rates to near zero is based on the traditional view that a lower cost of debt funding will boost aggregate demand via an increase in capital spending as well as higher borrowing by the private sector. The credibility of this viewpoint has, however, been increasingly questioned over time, particularly in the wake of Japan’s prolonged experience with ultra-low interest rates and its ensuing failure to encourage the growth of private sector leverage. Nominal interest rates remain very low in advanced economies, but there is considerable variation on inflation-adjusted measures on a cross-border basis. Real interest rates remain high in Japan due to deflationary expectations, despite the fact that prices have ceased falling. It was the persistence of deflationary psychology and high real interest rates that consequently produced a prolonged corporate balance sheet recession, where the main objective was to pay down debt. Risk-taking endeavours, such as capital spending, were, therefore, off-limits during this period. Despite having much healthier balance sheets, Corporate Japan continues to sit on a mountain of cash, equivalent to 48% of GDP. Meanwhile, US companies also continue to operate with high levels of liquidity. The willingness to use leverage during the current cycle has, however, been somewhat higher in the US vis-à  -vis Japan. There is also aShow MoreRelatedHow Does Cracks Appear Within The Fomc s Unity Essay1606 Words   |  7 Pagescase for a higher policy rate had recently strengthened, Fed Chair Yellen has flip-flopped and sided with the dovish members of the Federal Open Market Committee (FOMC). 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