Transcript: Bank of Japan ditches negative rates

This is an audio transcript of the FT News Briefing podcast episode: ‘Bank of Japan ditches negative rates’

Sonja Hutson
Good morning from the Financial Times. Today is Wednesday, March 20th, and this is your FT News Briefing.

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Sonja Hutson
The Bank of Japan is finally leaving negative interest rates behind. And Microsoft has hired a big name in AI. Plus, some countries are trying to poach Europe’s AI start-ups. I’m Sonja Hutson, and here’s the news you need to start your day.

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Microsoft has hired the co-founder of Google’s DeepMind. Mustafa Suleyman will run a new consumer AI division that will bring together products like Bing and Copilot. It’s the latest move by the tech giant to capitalise on the boom in artificial intelligence, and it’s a race that Microsoft seems to be winning after its huge investment in OpenAI. But antitrust regulators are on its heels. The US and the EU have been looking into Microsoft as part of broader inquiries into AI investments.

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The Bank of Japan has raised borrowing costs for the first time since 2007. The BoJ pushed up rates to a range of zero to 0.1 per cent, finally getting out of negative interest rates. It’s the end of one of the most controversial economic experiments in recent times. And here to talk to me about it is the FT’s Asia editor Robin Harding. Hey, Robin.

Robin Harding
Hi, there.

Sonja Hutson
All right, Robin, let’s start with the BoJ’s decision to raise interest rates. What was the reason behind it?

Robin Harding
Well, basically, it’s because they think that inflation is on track to be at their target, which is 2 per cent at the end of next year. And if inflation’s on target they think, fine, we don’t need to have negative interest rates anymore. Can it be maintained? That is the big question. Wages are still quite weak in Japan. And in the long run, wages are what make inflation go up. When wages are going up it drives prices up. And so there’s a big question about whether Japan really has moved to a new era of inflation or not. Let’s see. But I think give the Bank of Japan some credit. They’ve been working towards this day for a long time.

Sonja Hutson
Yeah. And just to take a little bit of a step back here, why were interest rates below zero for so long?

Robin Harding
It all goes back to 1990, which is when Japan’s bubble burst. And then during the 90s, things went quite badly wrong, and Japan ended up in deflation — ie prices were falling and they ended up with zero interest rates. And the last 30 years have been an effort to basically get back to some kind of normality. The kind of normality we understand as, you know, you have positive inflation and you have positive interest rates. Along the way, Japan pioneered all sorts of things, such as quantitative easing that later became very important everywhere else. So in a way, this is the culmination of three decades of experimentation with monetary policy.

Sonja Hutson
OK. So as the BoJ enters this new era, what questions do you think it will be grappling with now?

Robin Harding
It was a very complicated decision. But in terms of where things go from here, the important thing was a message that they expect accommodative policy to continue for now, which is basically central bank code for expect interest rates in general to remain very low for the foreseeable future. So I think that’s what we’re expecting in Japan now. This isn’t going to mark a sudden shift towards what you might think of as normal interest rates: 2, 3, 4, 5 per cent. Instead, they’re likely to remain very low for the foreseeable future, at least until the Bank of Japan has a sense of whether it really is back in an inflationary rather than a deflationary world.

Sonja Hutson
Well, OK. How can we tell then whether this deflationary period really is over for Japan?

Robin Harding
Well, the BoJ referred to extreme uncertainty, which is rare words for a central bank to say so strongly. But what that basically means is they just don’t know whether they’re really on track with inflation or not. A very big uncertainty is the Fed because the gap between Japanese interest rates and US interest rates is extremely wide at the moment. That makes a huge difference in terms of where investors put their money. So if the Fed starts cutting rates and that gap starts narrowing, I think what you can expect is that the yen will start to rise. And if the yen starts to rise, that means that all the things Japan has to buy from abroad — such as oil, food — start to get cheaper. So that would put downward pressure on inflation in Japan. And that will be the real test really, is can Japan sustain inflation by itself even if the outside world is sending it cheaper goods? And we don’t know the answer to that question, but I think it’s gonna be very significant for the future of Japan’s economy, its interest rates and its monetary policy.

Sonja Hutson
Robin Harding is the FT’s Asia editor. Thanks, Robin.

Robin Harding
(Inaudible)

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Sonja Hutson
Unilever is getting out of the ice cream business. That means it’s looking to offload brands like Ben and Jerry’s and Magnum. The group hopes that splitting off this side of the business will help reduce costs and boost growth. Unilever is looking to save roughly €800mn over the next three years and cut 7,500 jobs. The goal is to publicly list the ice cream division by the end of 2025. Shares in the company rose as much as 5 per cent on Tuesday after the announcement.

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Major AI start-ups from Europe in the UK are being lobbied to move their headquarters to other countries. It’s part of a global push by states not typically known for their tech expertise to become major players in artificial intelligence. Here to talk to me about it is the FT’s Cristina Criddle. Hey, Cristina.

Cristina Criddle
Hi.

Sonja Hutson
So, which countries are trying to poach these start-ups, and what are some of their goals in doing that?

Cristina Criddle
The ones in particular that we’ve heard of are Canada and the UAE. But we’ve also heard about countries like Singapore. And the reason that they want to do this is because we know that AI is huge and it’s only gonna get bigger, and you have these tech superpowers of the US and China. Many countries want to set themselves apart from other countries and say, we have great talent, we have great companies here, and we are a leader in AI who can at least complement the US and Chinese companies.

Sonja Hutson
And what are countries like Canada and the UAE offering these AI start-ups?

Cristina Criddle
So Canada does have a bit of a legacy of AI research. So they are really leaning on that research, but also saying that you can get a visa much more quickly. And then in the UAE they also have similar visa arrangements, but they also offer good tax rebates and have just formed a tech hub in Abu Dhabi as well to attract companies over.

Sonja Hutson
Cristina, why is this happening now? Do these countries see some kind of an opening to lure start-ups away from Europe?

Cristina Criddle
Over the past year, you’ve seen this huge emergence of AI, and there have been lots of calls to regulate it. And one of the fastest regulations has been in the EU and the EU-AI Act, which was passed last week. And basically some people have criticised it for being too strict that it’s overregulating the industry before it’s really had a chance to innovate. It actually places some quite strict rules on creators of large language models or foundation models with AI. And so critics of the regulations say it’s gonna stop us from innovating. It’s gonna stop us from moving so fast and really competing with some of those big tech firms.

Sonja Hutson
Got it. So these other countries are saying, hey, we don’t have the AI Act. You know, this is a place where you can really experiment more.

Cristina Criddle
Exactly. Jonas Andrulis, who’s the founder and chief executive of a German company called Aleph Alpha, basically said that he’s been approached by countries who are saying, oh now with all that horrible regulation, don’t you just wanna move? And so it’s being used as a bit of a reason for why you should move out of Europe.

Sonja Hutson
And how convincing are these offers? Do we have a sense yet if companies are gonna go for them?

Cristina Criddle
I’m not sure how well it’s working. A lot of the companies I spoke to said, you know, they’re committed to Europe. They’re committed to European values and want to boost the ecosystem in Europe. But we still haven’t seen this regulation properly come into force yet, and we probably won’t for a little while. So whether they find it too restrictive when it comes in, that might lead to some people moving. You have seen a few start-ups moving across to Canada already. Captain AI is one of them, who’s moving out of London and is in the process of moving over to Canada now. And certainly, you’re seeing a lot of expansion in some of these countries of the AI companies.

Sonja Hutson
Cristina Criddle is a technology reporter for the FT. Thanks so much.

Cristina Criddle
Thank you.

Sonja Hutson
Before we go, don’t forget that from now until April 4th, the Briefing is offering 40 per cent off a standard digital subscription to the FT. Just go to FT.com/briefingsale to take advantage of the deal. We’ll also have a link to that in our show notes.

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This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.