The story of Low Interest Rates in Japan-"Cheap Money"

Japan is a land of savers. The high rate of savings rate is largely attributed to the demographic trends in the economy-the Japanese population is aging rapidly & as older people have a lesser propensity to consume-they tend to spend less of their income.

The period 1991-2000 is termed as the "Lost Decade" in the history of Japanese economy. It was considered to be a period of stagnant growth because the Japanese economy was bearing the after-effects of the speculation bubble of late 1980's.

So, the early 1990's saw-the high savings rate coupled with a slow economy. The slowing down of the economy increased the level of job insecurity in a country where citizens were used to lifetime employment. To ensure they have enough money in their hands to meet contingencies-the savings rate increased even more which drove down borrowing. All these factors led to the presence of "cheap money"- that is loan available at unbelievably low interest rates-with short term borrowing often below even 1%.

Due to sharp difference interest rates offered by Japanese bank & a U.S. bank (say), the U.S. investors took advantage of the cheap interest rates by investing their money in Japan & converting them into dollars later. But all this involved a lot of gamble! If the yen appreciated in value more than the interest rate advantage of borrowing the yen, the U.S. investor would actually LOSE money. This happened during the time when sub-prime crisis was at its peak (2007-2008) & there was declining interest rates in the U.S economy.This period saw the fall in dollar relative to the yen and many investors lost their money due to this.

Indeed, if we were to strictly follow the theory taught in the books of international finance-low interest rates will be offset by anticipated appreciation while high interest rates will be offset by anticipated depreciation.


Another interesting thing to note is the difference in the savings & consumption habits of a Japanese and an American. They are extremely opposite-poles apart..! The Japanese like to save & the Americans like to live for today-& consume. The age of consumerism without doubt haunts the American economy.


-Tejas Singh