Japan’s loose monetary policy: Galloping inflation or national bankruptcy?

Japan continues to pursue its zero interest rate policy. This is particularly favorable for the heavily indebted state. The director of the German Institute for Japanese Studies warns of a possible “horror scenario”.

If one speaks of Japan and its finances, the term loose monetary policy appears at the latest in the second sentence. “The central banks make money available to the economy. Now you normally imagine that they would simply fire up the printing press and print more banknotes. But actually, monetary policy works in such a way that the central bank makes so-called central bank money available to the commercial banks,” explains Franz Waldenberger , Director at the Institute for Japanese Studies in Tokyo. “And the commercial banks can then use that to pass on loans to the economy.”

Borrowed money parked at central bank

But contrary to what was hoped, the economy has not been stimulated in this way, and there have been no investments. Instead, the borrowed money was parked back at the central bank. Japan’s long-standing zero interest rate policy is particularly beneficial for the heavily indebted state, because loans are cheap.

They are negative for savers and the economy. “The low interest rates have meant that companies that are less productive can continue to exist because of the low interest rates,” says Waldenberger. This hinders the more productive companies. “Then they don’t get the people to keep growing. And given the demographic development, that’s actually something that Japan can’t afford.”

Wages have remained almost the same for 20 years

For a long time everything went smoothly, says the director of the German Institute for Japanese Studies. But that could change now. Because food prices have risen drastically here too. And consumers are very allergic to that, because wages have remained almost the same for 20 years. Approval for government policies plummeted less than a month before the upper house elections.

“Horror scenario – that inflation gets out of hand”

And the yen is weakening – not a good sign, central bank governor Haruhiko Kuroda said at the end of the week. The currency collapse makes it difficult to plan for the future, is undesirable and bad for the economy.

Waldenberger sees it the same way and is quite worried. “I don’t hope that there has to be this blatant decision: runaway inflation or national bankruptcy.” That’s the horror scenario that some people see, “that interest rates will eventually go up or, if the central bank keeps trying to keep rates low, inflation just gets out of hand.”