Japan, one of the world’s most powerful superpower countries, has one of the highest GDPs in the world, but also one of the highest debts as well. For many decades, Japan has been a heavily import-dependent country, given that it still relies 90% on imported energy, alongside relying upon imports to supply 60% of its food, making it very vulnerable as a result of these resources being very essential to a country’s growth and survival.
Image: MyWoWo
Just a few months ago, the Japanese Yen came to its lowest value in 34 years, and inflation has returned to Japan once again. These could have catastrophic impacts, especially with economists predicting that the yen will decline further. However, even though inflation is very common in many countries, the strategy of raising interest rates to tackle inflation is not a viable option for Japan. This is because of the attitudes of households in Japan and also a result of Japan not following the regular rules that other countries adhere to, in addition to the failures of the Bank of Japan.
From 1990 to 1999, when Japan faced its major financial crisis after decades of exponential economic growth (where during Japan’s industrial revolution, the GDP multiplied by a factor of 8 from just 1955 to 1990), it impacted its economy significantly. This led to residential house prices falling by over 50% in just a few decades, and these figures were even worse for Japan’s stock index and commercial property, which fell by over 80%. Ever since this economic crisis, Japan’s growth and inflation have not been as exponential as in other countries, and Japan is growing at a very slow rate.
According to Bloomberg and other sources, this was a result of a balance sheet recession, where businesses and individuals in Japan took large amounts of debt during the period of 1955 to 1990 (also known as the Japanese Miracle), in order to buy assets that were constantly increasing in value.
Image: Britannica
However, after these assets started to significantly lose a lot of value, these asset holders realized that Japan’s economy was no longer exponentially growing. This led to asset holders selling off assets in order to pay off their debt. However, as a large number of businesses and individuals simultaneously started to focus on minimizing debt rather than maximizing profit, the strategies of controlling interest rates failed, as a very small proportion of people preferred to still borrow money.
This caused the Japanese banks and government to experiment with deflation instead, which shows that the people of Japan discouraged borrowing money. However, this meant that inflation rates went below zero, and as seen in an article previously on Japan’s negative interest rates, the government has to keep on providing more money to keep the prices high and stable, and also stimulate economic activity.
This means that the government of Japan is constantly incurring government debt by buying corporate debt and other financial assets in order to keep the economy running. However, Japan has now become the country with the highest percentage of national debt, as a result of excessive quantitative easing (a practice that the government does, mentioned earlier). This meant that the Bank of Japan tried to accumulate so much government debt that it did not have to incur a lot of borrowing costs. This is known as yield curve control and has been done in Japan since 2016. This meant that even a small increase in interest rates to control inflation, especially when it started to rise globally in 2022, could lead to an even more significant rise in debt.
Image: The Japan Times
As Japan is already in so much debt, other countries are exploiting this weakness by making their currencies more powerful and using the advantage of Japan’s slow economic growth. This forces Japan, an import-dependent country, to try to make its currency, the Yen, competitive by utilizing its foreign exchange reserves in order to buy billions of dollars worth of Yen on markets. This was done very recently, a few weeks ago, and has made the Yen remain high in value, but it is very short-term and has made their economy unsustainable, as a result of Japan being dependent on whatever happens in international markets.
With the future of Japan being very volatile, Japan could either remain a superpower, with all global trends in markets following what they wish, or could very likely fail, with one of the highest debts in the world, and most importantly, have a declining currency and political instability.