Weekly Business Insights from Top Ten Business Magazines
Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Since September 2017 | Week 341 | March 22-28, 2024
Shaping Section | 1
Why Japan’s economy remains a warning to others
The Economist | March 19, 2024
Extractive Summary of the Article | Listen
For most of this century it has looked as if the world’s economy was turning Japanese, with low growth, below-target inflation and rock-bottom interest rates. Today the question is how much Japan will come to look like the rest of the world. On March 19th the Bank of Japan raised interest rates for the first time since 2007, after inflation seemed at last to have become entrenched. The interest-rate target for overnight loans, previously between minus 0.1% and 0%, will rise by a tenth of a percentage point. The central bank also scrapped its policy of yield-curve control, which capped long-term bond yields at 1%. Having kept monetary policy ultra-loose for years, Japan has now begun to follow the course set by other economies since widespread inflation took hold.
It is a remarkable moment. Before 2022 annual inflation had been above 2% for only 12 of the previous 120 months; today it has been above that level for 22 consecutive months. Japan’s biggest firms recently agreed to increase wages by 5.3%, a level that would have been unthinkable before the global inflation breakout. There is a sense that change is here to stay. Stocks have been booming—the Nikkei 225 recently passed the record it set in December 1989—and investors are optimistic about the economy.
Yet it would be wrong to conclude that Japan is de-Japanifying. More important than an economy’s nominal attributes such as inflation, headline interest rates and stockmarket growth are its real, structural features. If you look at the fundamentals, even the rise in interest rates is not quite what it seems. The 2% inflation target which the Bank of Japan believes is now in sight is 1.4 percentage points higher than the average inflation rate over the ten years to the end of 2021.
Rock-bottom real rates reflect the fact that Japan has abundant savings, partly because its population is so old—30% are over 65. Firms struggle to put these to productive use, because an economy with a shrinking population has less appetite for capital investment. Japan’s demography and reluctance to admit immigrants also constrain its growth. The IMF expects gdp to rise by only 0.5% annually over the next four years, compared with 2% in America. That is respectable given the lack of workers—growth in output per worker has been healthy. But it is hardly a resurgence.
3 key takeaways from the article
- On March 19th the Bank of Japan raised interest rates for the first time since 2007, after inflation seemed at last to have become entrenched. The interest-rate target for overnight loans, previously between minus 0.1% and 0%, will rise by a tenth of a percentage point. The central bank also scrapped its policy of yield-curve control, which capped long-term bond yields at 1%.
- It is a remarkable moment. Yet it would be wrong to conclude that Japan is de-Japanifying. More important than an economy’s nominal attributes such as inflation, headline interest rates and stockmarket growth are its real, structural features. If you look at the fundamentals, even the rise in interest rates is not quite what it seems.
- Rock-bottom real rates reflect the fact that Japan has abundant savings, partly because its population is so old—30% are over 65. Firms struggle to put these to productive use, because an economy with a shrinking population has less appetite for capital investment. Japan’s demography and reluctance to admit immigrants also constrain its growth.
(Copyrigh lies with the publisher)
Topics: Japan, Real Interest Rate, Development