Finance News: Interest rates in Japan

The Interest rates in Japan have always been very low. Long term average from 1972 to 2013 stands at 3.2%, while since February 1999, it has been at zero level.

The reason for keeping such low interest rates is to push growth and turn deflation into inflation. If we see the graph of CPI in Japan, we will hardly find a time (after 1990) when they were above zero level. Result was a deflating economy.

When most of the countries around the world are fighting with high inflation level, developed countries like Japan, America are fighting with low inflation. Starting from the year 2009, CPI started pushing up. But much to the disappointment of Bank of Japan, it fall back to sub zero level in 2012. It again started picking towards the middle of 2012-13.

Japan's new prime minister, Shinzo Abe assumed office in 26 December, 2012. Abe's major challenge was to boost the growth and control deflation. He started massive quantitative easing, coupled with high growth in infrastructure and the devaluation of Japanese Yen. His economic policies, which was now referred as Abenomics, started showing the result. Japanese Yen devalued approximately 25% with respect to US $. Also the unemployment rate also decreased from 4% to in 2012 to 3.7% in 2013.

Abenomics is a set of steps taken by Shinzo Abe to control the macroeconomic condition in Japan. It will have its impact on all the ways economy of a country can be controlled. For example change in Monetary policies like target inflation level of 2%, excessive quantitative easing, investment in infrastructure, correction of appreciating Yen and strategies to promote private investment. Change in Fiscal policies like Fiscal spending increase by 2% of GDP,which will increase the deficit to 11.5% of GDP for the year 2013.

What government is doing is confusing to me. On the one hand they have started QE, and on the other hand they are increasing tax rate. Consumption tax, which currently stands at 5%, is set to increase to 8% by 2014 and 10% by 2015. Increasing monetary base helps increasing demand and supply but what Japan is doing, is setting its path for default. Public debt as a percentage of GDP for Japan stands at 245% in 2013 which is even worse than Greece - 181.8%, Italy 127.3%, Portugal 123.7%.

Charts to supplement the reading

Monetary base of Japan