Japan, the world's second most advanced economy, recently made headlines for raising interest rates on central bank balances to 0.1% for the first time since 2007. This represents a shift from the previous eight years, when the rate was minus 0.1%.
Japan, the world's second most advanced economy, recently made headlines for raising interest rates on central bank balances to 0.1% for the first time since 2007. This represents a shift from the previous eight years, when the rate was minus 0.1%.
The Bank of Japan pursued an ultra-loose monetary policy for years, hoping that minimal interest rates would help the country emerge from economic stagnation and deflation, but with limited success. Efforts such as purchasing government bonds and imposing “yield curve control” to cap long-term interest rates have failed to sufficiently stimulate credit or economic growth.
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The Bank of Japan pursued an ultra-loose monetary policy for years, hoping that minimal interest rates would help the country emerge from economic stagnation and deflation, but with limited success. Efforts such as purchasing government bonds and imposing “yield curve control” to cap long-term interest rates have failed to sufficiently stimulate credit or economic growth.
Economic growth remained subdued and inflation continued to fall below the 2% target. According to the International Monetary Fund, Japan's average annual GDP growth is expected to remain around 0.5% over the next four years, largely due to Japan's shrinking and aging population. The shrinking workforce poses a challenge to capital utilization.
Nearly a third of Japan's population is over 65, and the country is struggling to reverse its declining birth rate. In 2020, just 840,000 babies were born in Japan, with the birth rate falling to 1.34 children per woman of childbearing age. As a result, the population of “new adults,” that is, 20-year-olds, represents less than 1% of the total population.
Although Japan has a high savings rate due to its elderly population, companies have been unable to use these savings to invest, resulting in persistently low interest rates.
The Bank of Japan's “bazooka” of stimulus measures repeatedly fueled inflation, but was never enough to keep it consistently at the central bank's target.
Now the rise in global inflation has done what monetary policy has not been able to do for years. Rising food and fuel prices have led to a slight increase in inflation. The Bank of Japan expects it to remain adamant as expectations may have soared in wage negotiations – unions pushed through the highest wage increases since 1991 in annual negotiations this month. Last year's negotiated increases were also the highest in three decades, but real incomes had actually fallen as inflation was higher. In addition to inflation, wage increases also reflect the pressures of a shrinking workforce.
Despite emerging monetary policy changes, Japan's economic recovery remains fragile after decades of deflation and stagnation. Nobody expects that to change. It is beyond the power of central banks to stimulate economies suffering from structural problems, such as Japan's aging population and declining workforce.
Investment and consumption remained low as Japanese people frequently drink alcohol, get married, buy cars or make major purchases and generally avoid taking risks. Three decades of economic stagnation and deflation have changed their attitudes to consumption. Young Japanese are sometimes called the “deflation generation” because their lifestyle contrasts with that of their parents, who lived during Japan's so-called bubble period.
Thousands of companies that fueled Japan's postwar economic growth and made it the world's third-largest economy are closing simply because the owners have no one to pass them on to, often referred to as the “national heir shortage.” It's such a dire situation that dating apps are being used to place heirless business owners with potential sons and daughters for adoption.
Japan can overcome the demographic challenges hampering its growth by allowing immigration from labor-surplus countries like India. India is set to be the world's most populous country, with a surplus of young people resulting in the world's largest working-age cohort, but not enough productive jobs to employ them as savings and capital shortages hinder the creation of limited jobs.
Other rich countries will likely have to deal with demographic trends similar to Japan's sooner rather than later. Unless the world finds a way to capitalize on the demographic advantages of countries like India, advanced economies will continue to stagnate. One way to achieve this is to change attitudes towards immigration.
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