Japan’s Massive Money Experiment

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Imagine a place where everything related to money is frozen in time. For almost three decades, your salary doesn’t increase, the price of your favorite unagi bowl stays the same, and the interest rate on your home mortgage hovers near zero. This was the reality in Japan. Prices remained stagnant, but it wasn’t always like this.

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Since the end of World War II, Japan has been Ground Zero for some of the biggest experiments in economics. Older Japanese citizens like Tomiko, a pensioner, and Suetaka, a real estate agent, have experienced a rollercoaster of economic changes throughout their lives. Now, Japan's central bank has decided to end its latest experiment and exit negative interest rates. For the first time since 2007, the Bank of Japan (BOJ) raised rates, signaling the end of YCC (Yield Curve Control) and negative rates.

But how did Japan's economy end up being managed so differently from the rest of the world, and how will this shift impact everyday life across the country?

The Japanese Economic Miracle

Japan’s growth wasn’t always stagnant. At one point, the economy was growing so fast that it appeared poised to overtake the US as the world’s largest economy. Taro Kimura, who covers the Japanese economy for Bloomberg and once worked at the BOJ, explains that after World War II, Japan achieved an “economic miracle” from the 1960s to the early 1970s. This growth was driven by rising domestic demand as the middle class expanded. By the late 1980s, Japan’s economy accounted for around 10% of the world’s total.

At the time, people were flush with cash, and reckless spending was common. The stock market hit record highs, and real estate prices soared. In fact, the land under Tokyo’s Imperial Palace was said to be as valuable as the entire state of California. But then, the bubble burst.

The Bubble Burst

In 1989, the BOJ sharply raised interest rates in an effort to curb speculation and control inflation. The government also introduced measures to cool the overheated property sector. As a result, the Nikkei stock index dropped to half of its peak value, and real estate prices plummeted. This led to a long-term downturn, and for nearly three decades, Japan experienced deflation—wage growth and inflation were almost nonexistent.

Decades of Deflation

During this period, one generation grew up without experiencing inflation. For many, inflation was a concept they only learned about in textbooks. In such a stagnant environment, people became accustomed to prices that didn’t change.

A small amount of inflation is typically seen as beneficial because it encourages spending, but Japan struggled to achieve even modest inflation. Despite central bank efforts, including cutting interest rates, inflation remained elusive.

Era of QQE and Negative Rates

In 2013, the BOJ introduced Quantitative and Qualitative Easing (QQE), an unconventional policy where it printed money to buy Japanese government bonds. This initially helped the economy, but Japan soon returned to deflation. In 2016, the BOJ adopted negative interest rates to discourage saving and stimulate spending. However, this policy did not work as intended.

The BOJ then introduced Yield Curve Control (YCC), a policy designed to control both short- and long-term interest rates to reduce fluctuations. But companies still struggled to find profitable investments domestically and began looking abroad. By 2022, Japan had become the largest foreign holder of US Treasury debt, overtaking China.

Inflation Returns

In 2022, Japan finally hit its 2% inflation target, but the causes were external—rising energy costs due to the Ukraine war and a weaker yen. This wasn’t the kind of inflation Japan wanted, as it wasn’t driven by increased consumer spending. Wages remained stagnant even as inflation surged to 4.3% in early 2023, the highest in decades. Despite this, large companies like Sony and Toyota, which export goods, saw their profits rise.

This finally led to wage increases, with major labor unions securing the largest pay raises in 30 years. On March 19, 2024, the BOJ ended its negative interest rate policy, marking its first rate hike in 17 years. The yield curve control was scrapped, and the BOJ reduced its purchases of exchange-traded funds (ETFs). The rate was raised from -0.1% to a range of 0% to 0.1%, bringing Japan back in line with global economic trends.

What’s Next?

With the end of negative rates, several changes are expected. Mortgages will become more expensive for the first time in decades, and the government’s debt burden—more than $8 trillion—will grow as interest payments rise. Companies will face higher borrowing costs, and the yen might strengthen, making trips to Japan more expensive while reducing the competitiveness of Japanese exports. On the flip side, investing in Japan could become more attractive, and cheaper fuel and food imports will benefit consumers.