Japan’s Massive Money Experiment Is Over. Now What?

Imagine a place where everything related to

money

is frozen in time. For nearly three decades, your salary doesn't change, the price of your bowl of unagi doesn't change, and the interest rate on your home mortgage is closer to zero. Well, that was the reality here in Japan. We were used to the price of everything staying more or less the same. But it was not always like this. Since the end of World War II, Japan has been ground zero for some of the biggest

experiment

s in economics. Older Japanese like Tomiko, a pensioner, and Suetaka, who runs a real estate agency, have experienced a rollercoaster of changes throughout their lives.

Now, Japan's central bank has decided it's time to end its latest

experiment

and get out of negative interest rates. For the first time since 2007, the Bank of Japan, or BOJ, raised rates. YCC. Missing. The end of negative rates too. So how did Japan decide to manage its economy so differently from the rest of the world? And how will this

massive

change affect daily life across the country? Japanese growth has not always been so stagnant. At one point, the economy was growing so fast that it looked like it was on the verge of overtaking the United States as the largest in the world.

Taro Kimura covers the Japanese economy for Bloomberg Economics. Before, he worked at the BOJ. So here it is with a mini history lesson. After the devastation of the postwar period, Japan achieved something called an economic miracle from the 1960s to the early 1970s. That growth was led by huge domestic demand because middle-class households were expanding. And in the late 1980s, Japan's economy actually accounted for about 10% of the world's total economy. At the time, many were flush with cash and reckless spending was the norm. In the late 1980s, the stock market was on the rise and reaching record highs.

What was craziest was the price of real estate. For example, the price of the Tokyo Imperial Palace land was said to be equivalent to the price of the state of California. Then came the arrest. In the first of its shock measures, the BOJ sharply raised interest rates in 1989, trying to curb speculation and control inflation. The government also introduced measures to cool down the real estate sector. The Nikkei stock price index fell to half its peak value and real estate prices also plummeted. That led to a long-term recession. Authorities had tried to slow down, but instead paralyzed the economy.

The Japanese experienced no wage growth or inflation for about three decades. That means a generation full of people. Growing up in Japan myself, I learned the concept of inflation from a macroeconomics textbook. Living in a world without inflation makes people stick to a certain product with a certain price. A small amount of inflation can help boost economic growth by keeping

money

moving. Most economies are aiming for relatively mild inflation, around 2%. But as you can see in the yellow, Japan's inflation remained below that figure for a long time. As things got worse, the Bank of Japan followed the typical central bank playbook: lower interest rates.

You can see that the Federal Reserve, for example, slashed rates to deal with the fallout from the 2008 financial crisis. But the BOJ, for more than 20 years, kept its line almost flat, but it did not help to bring out the country of deflation. In 2013, the Bank of Japan decided to do something drastic again. They introduced the Quantitative and Qualitative Easing policy, an unconventional measure where they basically print a large amount of cash and inject it into the market by aggressively purchasing Japanese government bonds. It was initially successful, but Japan faced deflation again a couple of years later, so the BOJ returned to its box of tricks.

In 2016, it adopted negative rates, a move that divided economists. The main objective was to discourage savings and also punish banks that hoarded cash. But that didn't work either. In response, the BOJ invented something called yield curve control. Yield curve control is an attempt for the BOJ to control not only short-term rates, but also long-term rates, so that businesses and households do not have to worry about too many fluctuations in interest rates. You could keep interest rates low by threatening to buy bonds, without always having to buy them. That still didn't solve everything. Companies couldn't find enough profitable ways to invest their money in Japan.

Many ended up looking for better yields abroad, to the point that Japan became the largest foreign holder of US Treasury debt, surpassing China. Suddenly, in 2022, all that changed. Japan finally reached its 2% inflation target. The problem was

what

caused it. First of all, it was the increase in energy costs due to the war in Ukraine. And second, a weaker yen. The Bank of Japan continued to ease its monetary policy to stimulate the economy and even inflation. However, other major central banks raised rates to fight inflation. In the end, it was external forces that pushed Japan to end its experiments.

In other words, it wasn't the kind of inflation Japan wanted, because it didn't come from consumers spending more. Wages remained low, even as inflation hit 4.3% in January 2023, the fastest in decades. But it still caused the yen to weaken, boosting profits for companies such as Sony and Toyota, which sell products abroad. This finally produced some signs of change. Business leaders, who used to be reluctant to increase compensation, have now begun to open themselves to increasing salaries. Major unions achieved the largest wage increases in 30 years. Finally, on March 19, 2024, the Bank of Japan took a big step. The Bank of Japan has ended negative interest rates, 17 years after the last increase.

They are escaping yield curve control. Basically, they will also support your ETF purchase. Raising the interest rate from -0.1% to a range of 0-0.1% doesn't sound like much, but it puts Japan back in line with other economies. We ask from above that if Japan's negative rate experiment ends,

what

now? Well, these are some of the changes we can expect to see. First, mortgages will become more expensive for the first time in decades. And they will increase interest payments on the government's more than $8 trillion of debt, which is about twice the size of the country's economy. The same will happen to companies.

It could also push the yen higher. That means your trips to Japan could be more expensive. And Japanese exports would also be affected. On the other hand, it can also make investing in Japan more lucrative. Additionally, cheaper fuel and food imports are good news for Japanese consumers.