Japan is the world’s laboratory. It’s in this country that in 2001, for the very first time, the famous quantitative easing measures were put in place that tried to break the believed-to-be impenetrable barrier of zero interest rates that had been set in 1999. It was a revolutionary endeavour for the time, led by successive governments motivated by the need to revive their economy. This staunchly unorthodox monetary policy now became common practice for Western central banks. The Fed, the ECB, the Bank of England and others haven’t been miserly in making use of this inverted lever whose clear and open objective was to rekindle inflationary pressures. This precious reflation would of course not come without public spending that would in turn stimulate the recovery of consumption and private investment. To rehash the very profound words of Paul Krugman, central banks — for the class of them that the Bank of Japan pioneered — signalled to the public that if necessary they would be prepared to lose control of inflation.
However, 20 years on and Japan is still stuck in its stagnation, still debating with itself in a soup made of anaemic growth, negligible inflation, declining wages and waning productivity. The calamitous implosion of Japan’s speculative bubble during the 1990s together with the global financial crisis that began in 2007, topped off by the current health crisis, now means that 16% of the Japanese population lives in poverty. This country is now the second-worst performer of the G7 from this point of view, after the US. Japan is also the land of all records since its public debt stacks up to 265% of its GDP, which makes it the world champion of all categories, and now too firing the warning shots with global public debt surging by more than a third over 2020 and 2021. So, the case study of Japan clearly shows us that nations that have a sovereign currency can rack up their expenditure without fearing inflation. However, this verdict needs to be refined because Japan — like many countries across the globe — is weighed down by structural problems that systematically hinder recovery, growth, inflation, and confidence. Low wages, impoverished retirements (because of the negative rates), declining education and training levels, and an ageing population that therefore consumes less, are the burdens weighing heavy on Japan’s economy and many other so-called developed economies.
He nevertheless tried everything, Shinzo Abe, Prime Minister from 2012 to 2020, and he nearly succeeded with his effervescent programmes centred around a tripartite idea of massively increasing public spending, triggering frantic debt purchases by the central bank, and reducing tax rates on companies. He was alas confronted with a miserly private sector that really didn’t play the game and that, very happy to see the public sector spending without counting, thus grew its reserves to record levels. In truth, Japan’s failure to relaunch inflation reveals the mentality of companies to be a deflationary one, in Japan like in many other countries. These companies do not seem to want to take over the reins from the public sector, having turned out to be entirely focused on their own savings and profits. Until the opposite happens, the multiple crises that have shaken our world over the last 20 years will formally attest to it, that we can only count on governments to save the economy.