Why Japan's Economy Still Needs Help After $3 Trillion Binge

CNN/Stylemagazine.com Newswire | 3/9/2018, 9:18 a.m.
Interest rates are rising in many of the world's major developed economies, with one big exception: Japan.

Daniel Shane

(CNN Money) -- Interest rates are rising in many of the world's major developed economies, with one big exception: Japan.

The world's third-biggest economy is stuck with negative interest rates and an enormous easy money program. That contrasts starkly with the United States and Europe, where central bankers are more focused on how quickly to hike rates and wind down the massive stimulus measures they introduced after the global financial crisis.

The reason for the difference is inflation. Or in Japan's case, the persistent lack of it.

Inflation has been steadily rising in both the United States and Europe over the past couple of years. Mild price increases are seen as positive because they encourage consumers to spend, generating more economic activity.

But since Japan's economic bubble burst in the early 1990s, prices have mostly been stagnating or falling. That's bad news economically because declining prices encourage consumers to put off spending.

"If you're 40 years old, you've spent half of your life in a world where prices tend to fall rather than increase," said Takuji Okubo, managing director at consultancy firm Japan Macro Advisors. It's a tough mindset for many Japanese consumers to shake off, in Okubo's view.

Buying up the bond market

The Bank of Japan has resorted to a number of drastic measures to try and deal with the problem.

The moves were led by the central bank's governor, Haruhiko Kuroda, who's expected to be reappointed to the job this month as his first five-year term comes to an end.

Under Kuroda, the bank embarked on a huge buying spree of government bonds in 2013 and stunned markets by expanding it the following year. The aim is to push down borrowing rates and encourage companies to invest more.

The approach means the bank has spent a staggering amount of money: its holdings of Japanese government bonds have soared by more than 330 trillion yen ($3 trillion) since Kuroda launched the stimulus program.

Because of the huge purchases, the central bank now owns almost half of the entire Japanese government bond market, according to data from Japan Macro Advisors.

In early 2016, the central bank took another extreme step, moving one of its key interest rates into negative territory, an attempt to prod banks to stop hoarding cash and lend more of it out to businesses and consumers.

Inflation stirring

Things have begun to change, but only very slowly. Inflation in Japan has picked up in recent months and reached almost 1% at the end of 2017 -- its highest level in years.

But it took a huge amount of effort just to get there. And Kuroda wants inflation closer to the bank's target of 2% before he seriously considers turning off the money spigot.

The central bank left its policy unchanged Friday following a two-day meeting. Marcel Thieliant, a Japan expert at Capital Economics, said he expects the bank's stance to remain the same "for the foreseeable future."