• The Bank of Japan’s dangerous experiment with normality
  • A new beginning, or the beginning of the end of the yen?
  • Why I’m optimistically worried

One month ago, I moved to Japan. We plan to stay about a year. The idea is to keep the kids bi-lingual.

I managed to rope my Dad into joining us for a week. We needed his help on the flights. The middle child is a bit of a handful, especially on a plane. I like to say that if she had been born when I was, we’d have lost the Cold War. But we managed to keep her busy. It only took the combined efforts of everyone on the plane though…

On the flight, my Dad told me a funny story about what happened when he worked for Sony around the time I was born. He was sent to Tokyo on a business trip. When he arrived in Japan without his suitcase, the airline was quick to respond. They gave him tokens to buy the clothes he’d need for his business meeting the next day.

But, back in those days, everything in Japan was rather expensive. The money the airline gave him was only enough to buy underwear and socks…

In fact, Japan was in the last throws of an outright mania. People thought the Japanese would buy up the West Coast of the US and the East Coast of Australia with all their money. Businessmen studied books about how to become more Japanese. Universities had courses dedicated to it.

All Australian school children had to learn Japanese for decades. Recently, just in time for the China bubble to pop, they began learning Chinese instead. I suspect there’s some sort of economic indicator in which language Australian school children are forced to learn. By the time the school system shifts to reflect the real world, the boom turns to bust.

My own snapshot of Japan begins with everything being incredibly cheap. You can get a reasonable lunch in the city for under two pounds, for example. Although that’s mainly thanks to the recent devaluation of the yen. It’s lost about a third of its value relative to the US dollar and British pound since 2021. Still, the economic crash that’s played out in Japan since my Dad left has been legendary. A 30-year “lost decade”.

Growing up, I had no interest in Japan. Didn’t even know “Konnichiwa” when I met my wife. So I can’t imagine what it must’ve been like for Japanese people to experience the last 35 years of being in the economic twilight zone. They went from dominating global business trends to being an awkward talking point. Finance and economics professors had to fend off “what about Japan” comments every time they tried to teach anyone about inflation or stock markets going up in the long run. All they could say is “Japan is different.”When I asked one Japanese bartender about his own experiences, he gave me some advice he’d learned from “the bubble” as they call it here: “Don’t spend money on loose women when times are good.”

Conveniently, Japan’s 30-year “lost decade” might finally be over.

A new beginning for Japan, or the beginning of the end?

It’s a bit like my move back to the UK in 2015. I’ve arrived just in time for the launch of a rather significant experiment. Instead of Brexit, the Bank of Japan is busy pulling the plug on Japan’s monetary life support. Nobody is entirely sure whether the country’s economy will survive or get rushed back into hospital momentarily.

The details are difficult to explain without a book’s worth of context. Indeed, it’s how bizarre the past few decades of monetary policy have been that’s the real story. Telling people that the Bank of Japan raised interest rates above zero doesn’t sound like much of a news item to us. But it also ends a series of policies that would make Weimar central bankers blush.

It wasn’t just negative interest rates. The central bank bought up about 7% of the entire Japanese stock market to try to flood the economy with money. It bought so many government bonds that it may have bought some of them twice.

It’s worth explaining how that can occur to illustrate just how bizarre things got. The Bank of Japan’s quantitative easing (QE) bought up so many government bonds that it caused shortages of those bonds in the market. To resolve this, the Bank of Japan lent the bonds it had purchased to those who needed them. And then some of those bonds were bought again under the QE programme.

Bloomberg reported in January last year that the Bank of Japan owned ¥7.87 trillion worth of bonds maturing in March 2030. But there are only ¥6.86 trillion of those bonds outstanding…

The Bank of Japan also attempted a long list of other policies, including intervention in the foreign exchange market and yield curve control. In short, they tried everything. They threw the kitchen sink, the baby and the bathwater at the problem of deflation.

But Japan’s deflation has been so persistent that people are accustomed to getting pay cuts each year. The purchasing power of their money rises to make up for this, of course. It also explains why people like to use cash in Japan. The value of their money rises in their pocket!

Back to the Bank of Japan’s experiment. Presuming that inflation has indeed returned to the land of the rising sun, the Bank of Japan suspended its extraordinary monetary policy.

The immediate reaction was intriguing. The yen fell and the stock market couldn’t quite make up its mind. That’s an unusual combination.

You see, Japan’s economic fortunes rest with its exports. When the yen weakens, those companies’ profits rise in terms of yen. And Japanese products become more competitive on global markets. As a result, a weaker yen usually pumps the Japanese stock market up. That’s been the story of the past year or so, with the Japanese market hitting an all-time high for the first time since I was born.

Higher interest rates should mean a higher yen because the rates attract more savings. Unless, of course, people expect the inflation to get out of hand. The challenge for central bankers is that Japan has so much debt, any interest rate increase implies an extraordinary interest bill. And so it might be impossible to rein in inflation.

Why I’m optimistically worried

There’s no question in my mind that Japan has the highest cost-adjusted quality of life in the world. Presuming you don’t need to work in a Japanese company, that is. Their workplace culture is… problematic.

That aside, the cost of living here is extraordinarily cheap. The quality of items, food and service is exceptional. Yesterday, I sat on a toilet that spoke 14 languages!

But how much of Japan’s economy rests on such low interest rates? Could it be like the green tech bubble that imploded when interest rates surged over the past three years?

What is the end of the Bank of Japan’s life support going to trigger for Japan? Can a nation with Japan’s debt levels and demographics survive positive interest rates?

To be perfectly honest, I hope things go as badly as I’m inclined to believe they will. Japan could become even cheaper for me if the yen crashes further to reflect Japan’s economic problems as it deals with a choice between a debt crisis and more inflation.

That choice will be a preview of our own in the UK in coming years. It’s time to get obsessed with Japan again. That’s why I’m here.

Until next time,

Nick Hubble
Editor, Fortune & Freedom