Finally, the Bank of Japan ended their negative interest rates regime on Tuesday 19th March 2024. This operation to pay commercial banks a small interest on their borrowings has been one of the most radical decisions taken by central banks. Such decisions were subsequently followed by the UK, Eurozone, and USA, to practically no avail.

The roots of such decisions can be found in the monetarist policies where the monetary control over the economy is enormous. Even here, the idea was to improve output growth by making obscenely excessive amounts of money available to the economy. Paying interest to the borrowers to boost money supply took the monetarist controls to the next level. Though this policy has been in operations for decades, the end result is that Japan is still unable to register any growth in its output.

Looking at the reasons for the lack of output growth, a few factors are prominent.

• Japan ceded ground the export front in the 90’s, which was one of the reasons to boost the output through monetary policy. Cheap electronics shifted to China and Korea and so did the efficient passenger car market. Japan had industrial parts exports in a sizeable number, which also shifted to China. Looking at the declining exports and stability of the GDP, Japan had a stable and self-sufficient society, with the growth in output attributed majorly to income from export of excess production.

•  The speed and quality of innovations in the 70’s and 80’s which Japan was idolized for, decelerated and currently Japan has not gotten any worthwhile innovations which can be monetized for output growth.

• Japan currently looks like a post-modern economy, with stable, though not growing, output, declining population, and extreme shift to services-based economy. Manufacturing and Construction activities trail most major service activities in terms of growth, and this can be remedied by pumping more money into it.

• Pursuing Quantitative Easing, Japan has piled up a huge amount of domestic debt, which needs to be now serviced with interest. This again will put pressure on the government finances, which can be redeemed to some extent by tax hikes. Such tax hikes might be neutral to GDP growth, if calibrated appropriately.

• For a post-modern economy, the GDP growth is not a panacea, and Japan can continue to post negligible or zero growth but still be a stable economy, given its declining population.

• If the GDP growth is considered paramount, the decision makers should look inwards, in terms of making policies towards encouraging businesses to invest internally and work on a portfolio on new, innovative, and path-breaking technologies, for which Japan has achieve fame in the past. This encouragement and expansion in innovative manufacturing would be one of the avenues to achieve decent output growth. For example, Japan can build up on its expertise to make more fuel-efficient passenger aircrafts, ships and also get involved into nano technology and quantum computing, to name a few. As banks will start earning interest on their deposits with the central bank, they will have more money at their disposal to fund such an expansion in manufacturing.

• In services segment, Japan can promote tourism and advanced medical facilities to attract business from offshore.

• The fall in the working-age population, which is getting alarming, can be tackled through a qualified and controlled flow of foreign talent to fill up those jobs which have been acting as hindrance to business growth.

The boost in the GDP can create more revenue sources for the Japanese government through tax income, which can be utilized to repay the mountain of debt it has created for itself.

In addition to boosting output growth, though not life-and-death urgency for Japan, they can look at the present situation in terms of their investments.

Japan is one of the biggest net investors in the world, thanks to the easy money made available by the central bank decisions. Once the interest rates rise, some of such hot money parked in foreign portfolios might start coming back to be held or invested locally. Though this seems difficult as most of the global bonds and stock markets provide much higher returns and until both the Fed and the ECB continue to hold interest rates at higher level, this reverse flow might not be strong enough.

However, the external investments do provide a cushion to the economy in terms of interest and dividends earned, making the investing entities strengthen their balance sheets. Even the Japanese government, through vehicles such as JICA can continue earning on their investments to retain their financial stability.

In summary, this move from the BoJ must be welcomed, as it is never too late. Japan has lot of strengths which were ignored while chasing mirage of relentless growth with artificial measures. Let the industry flourish, let the innovations swell to keep a healthy growth, though small in quantum. Idea is to ensure that the stability of income and consumption of Japanese citizens endures, and the government lets the private institutions take the burden of maintaining and enhancing output growth through innovation and enterprise.