The Abenomics: Why Japan put their interest rate to negative
Japan has always been an old country, where most of the population is over 60 years old and saves all their money in banks. They do not consume it or invest it, they just save it, carrying a deflation in the country for decades. In the '90s, when the Japanese government raised the consumption taxes from 3% to 5% in 1997 because of a budget deficit, the problem became worse. People consumed less and the income from taxes was lower, causing a recession in the economy.
In 2014 a new prime minister arrived, Shinzo Abe. He proposed a plan called “The Abenomics” to restore the economy of Japan. This plan consisted of three main ways to fix it:
- The re-entry into the workforce of many Japanese women and the reform of many laws that did not allow foreigners to work in Japan. The Japanese population was getting older by the years, making it hard for Japan to look for a young workforce.
- The expansionary monetary policies. The goal was to achieve the 2% of inflation and to commit this, the Central Bank of Japan put their interest rate into negative, putting it down to -0.1%. This means, less savings for households as they had to pay 1% every time they left their money in the bank. Shinzo wanted the People to spend their money or invest it.
Although, some people think this was not the best decision to take the economy out of deflation. Martin Schulz of the Fujitsu Institute in Tokyo said that the way was not through the monetary policies, but the structural reforms to have more opportunities for invest it.
Abe, who took office in December 2012, announced at the beginning of his term an additional injection of more than one trillion yen (US $ 104 billion) to stimulate the economy with public investment in infrastructure. This meant more employment every time the government spent on new construction, and for this, there was more money circulating in the economy for consumption.
In these 20 years of economic stagnation, Japan has become the country with the highest fiscal debt on the planet: 240% of GDP. After the pandemic and the natural deflation in this country, now People ask themselves, how is Japan going to raise the revenue to pay all this debt?