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

Imagine this: A place where money matters are stuck in a time warp.

For almost 30 years, your salary stays the same, the price of your favorite unagi bowl doesn’t change, and your home mortgage interest rate is practically zero. This was Japan’s reality.

But it wasn’t always like this.

Since the end of World War II, Japan has been a playground for bold economic experiments. Older folks like Tomiko, a pensioner, and Suetaka, a real estate agent, have seen it all.

Now, Japan’s central bank has decided it’s time for a big change—saying goodbye to negative interest rates for the first time since 2007.

Japan’s Economic Rollercoaster

Once upon a time, Japan’s economy was booming so fast it seemed poised to overtake the US as the world’s biggest. Taro Kimura from Bloomberg Economics, who once worked at the Bank of Japan (BOJ), gives us a quick history lesson:

After WWII, Japan’s economy skyrocketed from the 1960s to the early 70s, driven by a booming middle class. By the late 80s, Japan made up about 10% of the global economy. Everyone was cash-rich, and reckless spending was the norm.

The stock market soared, and real estate prices went through the roof. The land value of Tokyo’s Imperial Palace was said to be equal to the entire state of California!

Then Came the Bust

In 1989, the BOJ raised interest rates to curb speculation and cool the overheated property market.

The Nikkei stock index plummeted, real estate prices tanked, and the economy screeched to a halt. For three decades, wages and prices barely budged. Growing up in this era, many Japanese, like Taro, only knew inflation from textbooks.

A New Strategy: QQE

In 2013, the BOJ took drastic action with Quantitative and Qualitative Easing (QQE)—basically printing money to buy Japanese government bonds. It worked for a while, but deflation crept back.

In 2016, the BOJ introduced negative rates, hoping to deter saving and punish cash-hoarding banks. That didn’t work either. Next, they tried yield curve control to stabilize interest rates, but that still didn’t spur enough domestic investment.

Instead, Japanese companies invested abroad, making Japan the biggest foreign holder of US Treasury debt.

Inflation Makes a Comeback

In 2022, Japan finally hit its 2% inflation target, but not how they wanted.

Higher energy costs from the Ukraine war and a weaker yen drove inflation. Other central banks raised rates to fight inflation, pressuring Japan to follow suit.

Big Changes in 2024

By January 2023, inflation hit 4.3%, the highest in decades, but wages stayed low. This weakened the yen, boosting profits for exporters like Sony and Toyota.

Slowly, business leaders started raising wages. In March 2024, the BOJ ended negative rates, raising them from -0.1% to 0-0.1%, aligning with other economies.

What’s Next?

Mortgage rates will rise for the first time in decades, increasing interest payments on Japan’s massive debt and affecting companies too.

The yen might strengthen, making trips to Japan pricier and hitting exports. On the bright side, investing in Japan could become more attractive, and cheaper fuel and food imports will benefit consumers.