Low real rates, low growth and high debts are not going away
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 Japanfor the first time since 2007, after inflation seemed at last to have become entrenched. Interest on balances held at the bank, previously set at minus 0.1%, will now be plus 0.1%.
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—the Nikkei 225 recently passed its December 1989 record—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. This 1.
Rock-bottom real rates reflect the fact that Japan’s elderly population—30% are over 65—has abundant savings. Companies struggle to put these to productive use, because an economy with a shrinking population has a lower appetite for capital investment. Japan’s demography and its unwillingness to allow much immigration also constrain its growth. Thegrowth of just 0.5% over the next four years, compared with 2% in America.
Long before they got to such levels in Japan, the government would have to reduce its deficit, which was 5.6% ofin 2023. The economy would cool from fiscal belt-tightening, not higher rates. With monetary policy, as with growth, there remains only one path by which Japan will cease to be exceptional: if the rest of the world comes to resemble it.
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