THE MYTHS AND LEGENDS OF JAPAN´S 20 YEARS WITH ZERO INTEREST RATES / THE WALL STREET JOURNAL

The Myths and Legends of Japan’s 20 Years With Zero Interest Rates

Japan’s two decades of zero interest rates just haven’t stimulated enough

By Mike Bird

A time traveler from 1999 would find some familiar comforts in 2019: overalls have made a comeback, Pokémon is wildly popular and interest rates in Japan are still stuck around zero.


The apparent continuity—in economic policy as well as fashion—isn’t all it seems. The simple narrative that Japan has pursued over two decades of uninterrupted stimulus hides several changes in monetary policy. More worryingly for investors, the tendency of Japan’s fiscal guardians to run policy too tight shows little sign of fading.

The Bank of Japan’s stop-start approach is most obvious in the fact that it has actually raised interest rates three times since 1999: in 2000, 2006 and 2007. It was slower than its global peers to unleash the monetary bazooka following the financial crisis, with its balance sheet remaining roughly flat between 2005 and 2012. Even the idea that it has since been on an asset-buying spree needs more nuance. The BOJ has slowed its pace of government bond purchases to less than 30 trillion yen ($270.95 billion) a year, still hefty but far below its official target of 80 trillion yen.

If Japanese monetary policy has been less loose than assumed, the Ministry of Finance should shoulder more blame for the lack of a sustained recovery. Its consistent push for austere policies might seem sensible, with a government debt pile climbing toward 250% of GDP. But the government’s net interest payments peaked as a proportion of its revenue in the 1980s, and currently run at a fraction of 1% of Japanese economic output—a burden the nation can easily bear.

In trying to avoid a debt disaster that has never come, Japan’s fiscal authorities have fueled the slow-burning crisis of the last 20 years: persistently low demand, stagnant wages and rock-bottom inflation expectations. Corporate goods prices rose by just 0.6% in the year to January, according to data released Wednesday, the slowest increase in two years.
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The past is present: a Pikachu Carnival Parade in Yokohama, Japan, in 2017. Photo: Akio Kon/Bloomberg News


There is some good news. Basic wage growth is now at its highest since the late 1990s. Women have entered the workforce in droves and the number of job vacancies per applicant has reached multidecade highs. Corporate governance reforms offer some hope for Japanese stocks, currently trading at their cheapest in six years.

Investors may remain reticent about Japan until policy makers show they are willing to change.

The current plan to raise the country’s consumption tax in October—a move that’s likely to crimp demand—isn’t encouraging. Unless Japan’s bureaucrats start working in closer harmony, its experiment with zero interest rates could stretch well into a third decade.