The Japanese central bank raised interest rates above zero for the first time in seventeen years, just less than two weeks ago. It raised rates from -0.1% to 0-0.1%, ending the world’s last negative interest rate regime among major economies – and signaling to economists that Japan’s three-decade slump is finally over could be.
Tokiko Shimizu, assistant governor at the Bank of Japan, is among those who see the end of the negative interest rate regime as symbolic of Japan turning a corner – even if the rate hike is small by international banking standards.
“The step itself is very small: 10 basis points,” she said at the Fortune Innovation Forum in Hong Kong on Wednesday. “But it is a very big step for the Japanese economy.”
For the central banker, this historic step by Japan’s central bank reflects a new reality in the country, where wages and prices are rising after years of stagnation.
“The reason we decided to change this is because the virtuous cycle between wages and prices is happening,” she said, pointing to recent wage negotiations between Japanese companies and unions. Discussions led to a 5.28% pay increase, the largest increase in 33 years.
Shimizu noted that her peers in other G7 and G20 economies are more concerned about rapid wage growth than Japan’s central bank. Companies raise prices to account for higher labor costs, exacerbating inflation and encouraging workers to ask for more raises later. Economists blamed this wage-price spiral for persistent inflation and economic stagnation in Western economies in the 1970s, and concerns that this will happen again persist in many countries.
But Japan has instead faced a very different fight: It has struggled with persistent deflation for decades, resulting in lower consumption, stagnant wages and falling asset prices. For Shimizu and her colleagues, March wage negotiations show that Japan could finally see a more normal pattern of inflation.
On Wednesday, Shimizu predicted that further rate hikes were unlikely. “We expect the price movement to be around 2% in the coming years. This means that we will not see an interest rate increase [to be] necessary.”
Headline inflation accelerated to 2.8% in February. It was the 23rd month in a row that the figure has met or exceeded the central bank’s 2% price target.
Is Japan back?
Japan’s recent interest rate hike is just part of the bigger story that the world’s fourth-largest economy is back on track. The country’s stock markets have now surpassed the records set in December 1989, at the height of Japan’s bubble economy.
Jesper Koll, board director of the Okinawa Institute of Science and Technology and a longtime Japan watcher, said Wednesday that the country may have finally turned a corner.
Koll pointed out that the number of people leaving their jobs is an indication of a tightening labor market. “This has been the case for the past four or five years [quit rate] has increased very dramatically,” Koll said. “Japan’s elite, youth and next generation are now taking risks,” he continued, with two-thirds of young Japanese now moving to start-ups.
There are also changes at the top. “If you look at the age of the new CEOs appointed by listed companies by Japan’s leading companies, the age of the CEO has dropped from 69 to 57,” Koll said.
Companies are also reinvesting in Japan. Leading chipmaker Taiwan Semiconductor Manufacturing Company just opened a factory in Kumamoto Prefecture on Kyushu Island – also known as “Silicon Island” – in February.
Finally, Koll suggested that Japan was becoming an “immigration superpower,” with the traditionally closed country attracting many more migrants.
“Now there are 3.2 million non-Japanese living in Japan, of which 2.4 million actually work. When I showed up in Japan in the mid-1980s, there were barely 500,000,” Koll explains.
Aging population
Both Shimizu and Koll mentioned one key challenge facing Japan’s economy: the shrinking labor force. Japan has one of the oldest populations in the world, and the country’s government has been trying to increase fertility rates for more than a decade but has been unable to do so.
This means that Japan will have to maintain growth with fewer people. For Shimizu, the answer to the problem comes through robots, automation and AI.
“Japanese people like robots, compared to Western people,” she said, using a hug from Doraemon, the famous Japanese cartoon robot cat, to emphasize her point. Robots could help Japan encourage more women and older people to enter the workforce, expanding the country’s workforce, she explains.
Koll, on the other hand, sees demographic changes as a way to revive Japan’s economy.
“Japan is in this demographically good position because one in four is already over 70 years old and the baby boom generation will have to die gracefully,” Koll said.
“Now we have a clean slate for the younger generation,” he said. “This young generation is now leaving the Ministry of Finance… not going to Mitsubishi Corporation, but setting up a new company.”