Japan’s Ultraloose Monetary Policy Has Undermined Savings and Prosperity
Uncertainty over the corona crisis has raised the household savings in many countries. The closure of stores, restaurants, and borders has restricted people from spending money. The support of furlough, rescue credit, and the grant of tax-free bonuses by governments stabilizes incomes. Even in Japan where most stores and restaurants have remained open, the generous handout of around 950 US dollars to all residents increased the savings. Nevertheless, this is unlikely to reverse the long-term downward trend in household savings.
Figure 1: Japan: Interest Rates and Household Net Saving Rate
Source: IMF and Thomson Reuters. Net saving as a share of disposable income.
The savings of Japanese households have dramatically declined since the 1990s. In 1991 households saved ¥46.9 trillion (ca. $451 billion dollar). The savings rate exceeded 15 percent as a share of disposable income. In 2019, the savings have dropped by nearly 70 percent to ¥14.4 trillion (ca. $138 billion), which corresponds to a savings rate near 5 percent (figure 1). In 2014 the savings rate had even turned negative as the spending surged ahead of the consumption tax rate hike. Since then, this trend had been reversed by the temporarily positive impact of Abenomics on the business cycle and aggregate income, but this has abruptly ended with the corona shock.
The drastic dissaving of Japanese households originates in the Plaza Accord of September 1985. The five largest industrial nations decided on a strong appreciation of the yen, which plunged Japan into a deep “endaka fukyo”—i.e., a high-yen-induced recession. The sharp reduction of interest rates by the Bank of Japan mitigated the recession but also caused a stock and real estate market bubble. With the bursting of the bubble economy in December 1989, Japan fell into a lasting stagnation. The Bank of Japan flooded the economy with cheap money by lowering the policy interest rate from over 8 percent in 1990 to zero in 1999, where it has remained (figure 1). The Bank of Japan’s balance sheet expanded from 10 percent as a share of GDP in 199
Article from Mises Wire