This post took so long to research and write that I stopped trying to manage and therefore somewhat-professionally cite sources. I expect years to be precise, but I intentionally made figures approximate, nonetheless doing my best to remain directionally correct, which I believe I have. I encourage you to further investigate anything that might stand out to you as interesting or dubious.

Causes

While scrolling through X one day, one sentence about Japan caught my eye. "The very thing they need is the same thing that will destroy them." The only other clue in the post was the topic of bonds. I didn't understand the post at first and so started digging. The gist is that the yen is weak and its weakness is perpetuated in part by Japan's low interest rates on loans. But if Japan were to raise interest rates, they risk a domestic financial crisis.

But why? That's what we're going to explore in this post, as it is one of the causes of the symptom that is the declining birthrate in Japan.

Firstly, why is a weak yen difficult for Japan? Japan is very import-dependent, not only on fuel but also on certain foods and animal feed as well as raw industrial material. A weak yen makes these things relatively more expensive to buy. A weak yen also lowers real wages as the cost of goods increases relative to a fixed-amount paycheck. Businesses that sell their goods only domestically cannot raise prices to match new costs because the local customers' buying power is not scaling in tandem.

Well then, if Japan is the world's fourth-largest economy, why has the yen been weak for so long? Get your favorite tea and zabuton, because it's story time.

You know, we could probably start this story from something about Perry's Black Ships or maybe even in Mesopotamia, and then let a butterfly flap its wings until we generated enough context, but let us instead start in the early 1980s in the US. Loose US monetary policy, which is a seemingly-unnecessary nickname for low interest rates on loans, resulted in lots of domestic borrowing. People had more money for cheaper and so invested and bought more things. If the supply of money grows but the supply of goods does not keep pace, price inflation occurs. Around the same time, in the 70s, two major oil shocks reduced the supply of oil to the world, raising the price of oil and any goods requiring oil to produce. US consumer inflation reached a staggering ~15% in the early 80s.

To combat this inflation, the US Federal Reserve raised interest rates on loans. This makes it more expensive for banks and consumers to borrow money, which reduces the circulation of money in the economy, or in other words makes people more reluctant to purchase as many things. This also makes it more expensive for the government to borrow money. The government borrows money in the form of government bonds. In a non-lunatic economy, the government cannot just tell the central bank to create more money out of thin air and give it to the government to pay off its debts, as this would rapidly devalue the currency. So the intermediary of a government bond purchased by others is how the government closes its financial gap between money it raised by taxes and its required budget for the term.

An aside on bonds. For starters, a bond is a type of loan. A bond has principal, which is the face value of the loan. If I need $1,000, that amount is called the principal. It is the amount I receive from you immediately if you buy my bond. The maturity is the day the bond ends and I give you all of your money back. If my bond has a 5-year maturity, that means at the end of 5 years from now, I give you your $1,000 back in full (assuming I can pay it!). Now, you're going to lock up $1,000 of your cash in my bond over 5 years. If you were to invest that money in the S&P 500, or perhaps in a stock, or perhaps in your own company or yourself by way of education, you expect that $1,000 to actually be worth more than $1,000 in the long run because it enabled you to earn even more than its face value. Giving up this additional value on top of your $1,000 is called opportunity cost. So if you give me a $1,000 loan, you're going to want me to sweeten the deal by paying you back a little extra to make up for other lost opportunities you could have participated in with that $1,000. This is where the coupon rate comes into play. The coupon rate is the regular interest rate I need to pay you, usually once every six months or year. If the coupon rate is 1% and I need to pay you once a year, then after the first year you get $10, after the second year you get another $10, etc. and then in the final year you get the last $10 and also your initial investment back.

Returning to government bonds, the interest rate set on loans by the Federal Reserve impacts the coupon that the US government needs to set on its bonds. If I am a bank, and I know that I can make 5% interest yearly on some loan I make to someone else, the government has to offer similar incentives on its bonds to get me as the bank to buy government debt in the form of bonds.

Although the return on bonds may not be as lucrative as the return from investing in the stock market, bonds issued by large entities such as the US government are seen to be extremely low risk. If the US government disappears or is unable to service (pay back) its debt, you probably have a bigger issue on your hands than what happened to your one investment.

Now, imagine we live in a country where you can borrow large amounts of money in your native currency, C1, for, say, 1 or 2% interest. Let's say the coupon on a foreign government's bonds is currently 5%. If you borrow a bunch of money from your home currency and then use it to buy the foreign government bonds (by first converting your C1 into the foreign country's currency, C2), you're practically guaranteed to make money. I say practically because you do still have risk exposure, which is the value of the underlying currencies. If C2 suddenly becomes weaker than C1, your investment is now potentially a loss when measured in C1.

Among all countries that took advantage of the real opportunity to make money in this way, Japan invested the most, in the US. Japan's economy was booming, and Japan was making tons of money by exporting electronics and cars. Price inflation in the US meant that the cost of US-made goods was increasing, not just domestically but also in international markets, and thus the relative cost of Japanese (German, etc.) goods was declining, making foreign goods more attractive to US consumers than domestically-produced goods. Japanese firms had tons of surplus money and were looking for ways to put it to work. They did so using the bond investment strategy I outlined above, technically called an interest rate differential trade.

By the oft-stated law of supply and demand, as demand to hold debt in US dollars grew, and as higher interest rates restricted the supply of US dollars, the power of the US dollar grew relative to other currencies. American consumers were using the same $20 USD to buy more foreign products for cheaper than they could buy domestically for the same amount of money. This threatened the US economy which struggled to produce price-competitive products domestically. Large US firms lobbied the US government to intervene to protect American industry. US Congress began drafting protectionist policies that would impose tarrifs on or entirely block importing certain foreign goods. This threatened a global trade war.

So how do you fix this? You need a way to reduce the strength of the US dollar relative to all other major foreign currencies. If the US dollar rose in strength due to high demand and limitted supply, one approach is to reverse this. This is exactly what the leading economic powers (the "G5": US, Japan, West Germany, France, and the UK) did at the time, in a coordinated maneuver agreed to in the Plaza Accord, in New York, in 1985. The agreement was for the G5 to flood the supply of US dollars all at once, and they did so by selling off many of the US government bonds they held, converting their holdings into liquid dollars, and then trading those dollars for other countries' currencies on the global foreign exchange market (FOREX).

Supply and demand is like a seesaw. As the supply of US dollars rose, demand shrunk. Also, when private investors realized the G5 were coordinating to intentionally weaken the dollar, they too started selling their own investments in US dollars. Japan used its stockpile of now-liquid US dollars to buy back yen, thus reducing the supply of the yen and therefore strengthening it. In fact, the policy was more effective than anticipated. In just 2 years, 1 US dollar went from buying 240 yen to 120 yen, about a 50% depreciation in the US dollar and a reciprocal 50% appreciation in the yen.

The expectation was that the yen would only appreciate by 10% or so.

Again, when your currency grows in strength, your exports become more expensive. This did major damage to Japan's export-based economy. As Japanese exports became more expensive to American consumers, demand dropped and in turn so did domestic production. This led to layoffs and a short-term recession called the Endaka (円高), literally "high yen." If this continued, Japan was looking at a long-term recession.

The Japanese government's reaction to the Endaka impacted the finances and psychology of the Japanese for decades. Before going further in time, we need to go back in time and set the stage in Japan.

Building the Machine

The oil shocks of the 70s slowed the global economy, didn't just affect the US. Japanese firms wanted a way to protect profits and insulate themselves from market events outside their control. Because firms' exports had been so successful to date, they were sitting on large piles of surplus cash. They realized they could safely squeeze a few-percent yield out of this cash if they invested it. Toward this, firms created sophisticated financial divisions, even entire subsidiaries, that participated in the domestic bond market and even created financial instruments of their own. Soon, boring corporate finance evolved into sophisticated statistical modeling, projection, and day trading. The media called this sophistication 財テク ("Zaitech"), a portmanteau of 財務 (zaimu, finance) and テクノロジー (technology) and a play on the Japanese ハイテク (high-tech) borrowed from English.

In the early 80s, the US argued that Japan's highly-regulated financial system was intentionally keeping the yen weak internationally so as to give Japan a price advantage with its exports, creating an artificial trade barrier. In the 1984 US-Japan Yen-Dollar Committee, the US aimed to have Japan open its markets further to foreign investors so that more people could buy yen-backed assets, allowing the broader market to influence the price of the yen. Until this point, the Japanese government limited how much yen Japanese companies could move abroad. Japan loosened these regulations as a result of the Committee. The US's theory was that this would increase demand for the yen, strengthening it, making Japan's exports relatively more expensive, and thus fixing a trade imbalance between Japan and the US. However, now Japanese firms were legally allowed to deploy larger amounts of their surplus cash overseas, and they did so by converting their yen into dollars and buying high-yield US government bonds. This was a signal to the market that yen holders prefer dollars, which caused the yen to weaken even further.

Around this time, the Japanese Ministry of Finance was also eyeing Japanese firms' surplus cash, thinking how they could use it to stimulate the local economy and boost the domestic stock market. It was not uncommon for a firm to hold a large amount of stock of a partner firm, in part as a sign of good faith and in part as a way to encourage loyalty. If a firm wanted to buy more of its partner's stock years later and sell it off quickly to make a profit, the existing corporate finance laws resulted in heavy capital gains tax because stock price was determined using a weighted average cost method. I'll illustrate with a toy example.

If company A bought 100 shares of company B at 1 yen and then later bought 100 more shares of B at 2 yen and sold the latter 100 shares shortly after for a small profit, the 100 shares sold were said to have a base value of 1.5 yen each, not 2 yen each. The 1.5 yen comes from averaging the price of all individual units of stock of B that A holds across all of A's accounts.

(100 * 1 + 100 * 2) / (100 + 100) = 1.5

So if the latter 100 shares were sold for 2.1 yen each, meaning a difference of only 0.1 yen per share, capital gains tax was assessed as if the seller had actually made

2.1 - 1.5 = 0.6

yen per share profit. This obviously prevented Japanese companies from investing in each other fluidly, beyond lump-sum good-faith investments.

To sidestep this accounting rule, the Ministry of Finance created the 特定金銭信託--特金 (Tokkin, corporate investment fund) for short--fund type in 1984. Firms could now hand cash over to trust banks who would open a Tokkin account on the firm's behalf. The firm could then buy and sell shares of another company and have tax computed using a moving average of just the holdings in the Tokkin account.

The Tokkin account was quite magic, though, as it was a fund managed by a trust bank. Although firms provided the capital and essentially performed the trades, because the trust bank owned the fund, firms were not taxed on buying or selling shares of other companies. At the end of the year, the trust bank would pay the trading profits made inside the account back to the firm in the form of beneficiary trust dividends. These were largely if not entirely tax-free payouts.

Mythological Scarcity

As Japan recovered from World War II and its economy grew very rapidly, the price of land in large population centers increased. In fact, it only went up, for decades straight. To boot, Japan is roughly the size of California, but only ~33% of it is considered inhabitable. So land has always been naturally scarce. And as the population and heavy industry grew, the scarcity only became more noticeable. Eventually generations of Japanese found themselves subconsciously thinking the price of Japanese land would always go up, a phenomenon called the 土地神話 (Tochi Shinwa, land myth).

Kindling

With the US's plan in the US-Japan Yen-Dollar Committee having backfired, the US was particularly eager to balance the trade gap between them and Japan. This brings us back to the time after the Plaza Accord of 1985, Endaka.

In 1986, in response to Endaka, Maekawa Haruo, a former governor of the Bank of Japan, submitted an economic report to the then prime minister Nakasone Yasuhiro. The document came to be known as the Maekawa Report. It called for the government to wean the economy off of export-dependence and become more domestically self-sufficient, in particular by further deregulating financial markets and having the Bank of Japan lower interest rates. This economic model came to be known as 内需主導型 (Naijyu Shudougata, Domestic Demand-Led Recovery).

At the same time, since the US dollar had fallen 50% relative to the yen and Deutsche Mark as a result of the Plaza Accord, Washington was concerned the global market would lose faith in the US dollar. In 1987, the now-G6 (Canada joined) assembled and signed the Louvre Accord. This was a coordinated agreement that allowed the US to keep its interest rate stable and required Japan and West Germany to keep lower interest rates to help stabilize the dollar. Similarly to the Maekawa-report, it required Japan to invest heavily in domestic stimulus.

However, instead of Japanese firms investing in expanding their own operations by way of R&D, building more factories, or increasing an individual worker's productivity, firms realized they could make more money by deploying the new, cheap capital in speculative markets.

The tax-free schemes enabled by Tokkin coupled with the finance-savvy Zaitech arms of firms essentially meant that firms that were once "just" heavy industry manufacturers, real estate agencies, car companies, etc., now had their own in-house hedge funds with legally-ordained access to international securities markets, stockpiles of surplus cash, and the ability to borrow even more money for cheap. Not only could these companies borrow money from Japanese banks, but as noted previously, the Zaitech wings would create their own debt instruments and issue them directly, internationally, using their long history of trusted company performance to secure interest rates as low as 1 to 2%.

The speculative markets of choice were none other than the stock market and real estate market.

For stocks, firms invested heavily in the domestic Nikkei (Japan's version of the S&P 500, although never including as many as 500 companies) but also branched out internationally. Circular investing artificially inflated the stock market, what with company A investing in company B, inflating the value of company B, enabling company B to get more capital through loans, and company B buying shares of company A, inflating the value of company A, etc. The stock market had broken ties with reality as investors increasingly ignored fundamentals and long-term prospects of the companies they were investing in.

By 1987, Tokkin accounts held more than 30 trillion yen collectively.

As banks now also had access to cheaper capital, they were eager to make loans to companies and people. With the land myth so prevalent, banks accepted land as collateral for loans. If land prices kept increasing, a seemingly-obvious strategy was to take out a large loan, use your property as collateral, and then buy more land with the loaned money and hold the land until you can later sell it and realize a profit.

There is a famous story, that by 1989, the land value of Tokyo's Imperial Palace alone was worth more than the entire real estate market of California, roughly 1 trillion USD. If not true, it was close. Prime Tokyo land such as that in Chiyoda was trading for $139,000 (in 1989's USD) per square foot. Today, in 2026, the most expensive land in Silicon Valley sells for over $2,000 per square foot, orders of magnitude off. In Tokyo, the most expensive land is right outside the Kyukyodou Stationery Store in Ginza, selling for roughly $33,000 USD per square foot at the time of this writing.

The Japanese real estate market was 4 times that of the entire US by 1989, and land wealth was estimated to be 65% of Japan's national wealth at the time.

Leading up to 1987, land prices had increased by 50% in a single year. In 1987, banks were starting to issue 50-year loans, peaking at the famous 三世代ローン (san-sedai--three-generation--loan), a loan with a 100-year term, issued in 1990. The 100-year loans were not common, but they did exist and were issued. As one generation retired, the loan's legal obligation would automatically pass on to that generation's children, etc., until the loan was paid off.

Magically, despite so much yen in circulation and such little boost in long-term productivity, consumer price inflation remained below 1% through 1989. Nonetheless, Japan's money supply was growing at a rapid rate of nearly 10% per year. As a result of the Maekawa Report's call to revitalize the local economy, the government and real estate developers launched many large projects to build public infrastructure, facilities such as luxury resorts, and skyscrapers. The demand for blue-collar and service-work labor exploded, but as there was no corresponding advancement in productivity, there soon came a labor shortage. For a company to entice employees to work for them, they needed to raise wages. As so many companies were in this situation, this threatened a wage-hike spiral.

College graduates refused to work blue-collar jobs when they had cushy desk-job careers in the air-conditioned skyscrapers of banks, trading desks, and marketing firms waiting for them. Refused to the extent that blue-collar jobs were colloquially called "3K jobs," きつい, (kitsui, difficult or grueling), 汚い (kitanai, dirty), and 危険 (kiken, dangerous). 3K jobs were those like construction, working assembly lines in auto factories, trash collection, sewage maintenance, and janitorial work.

This post is about economics, but I feel it's interesting to mention details on immigration as well since the modern Japanese government is also toying with the idea of increasing immigration to cover labor shortages in blue-collar jobs.

To address the labor shortage in the 80s, foreign workers were brought in to do the 3K work, ultimately illegally. Until this time, illegal or undocumented workers were largely Koreans who had arrived in large groups over the decades following World War II. They would often arrive by night on fishing or cargo ships and disembark on the shorelines of Kyushu and western Japan. These Koreans often joined existing communities of Koreans in Japan and visually and linguistically did not immediately stand out relative to, say, an American. In the 80s, Japan's official policy forbade unskilled immigrants. So the trick was to issue legal tourist or student visas largely to Iranians, Pakistanis, Philippinos, and Bangladeshis. Those that were actually neither tourists nor students simply overstayed their visas and worked 3K jobs. Many Filipina women were brought in on specially-issued "entertainer" visas to work as professional dancers or singers, but many instead worked as hostesses in bars or clubs. Authorities turned a blind eye to overstayers and people working jobs outside the legal parameters of their visa unless that person committed a violent crime.

Returning to Japanese nationals, as time passed, the average salaryman who didn't already own land in Tokyo became unable to buy any at all, even using a 100-year loan. People were catching on to the machinations of Zaitech, and the image of the term had evolved from the sophisticated financial-modeling high-roller to the fat-cat speculator who gets to gamble with other peoples' money. The growing wealth inequality and concern over the rising number of immigrants created social unrest. This, coupled with the aforementioned issues and additional factors such as the increasing price of oil in the late 80's (approaching the Gulf War), had the Japanese government concerned about impending economic and social crises.

Ignition

In December 1989, Mieno Yasushi took office as the new governor of the Bank of Japan. Unlike his predecssor, Mieno was an institutional purist. He held a firm, public stance that Tokyo's real estate prices were insane and that the government had shamefully allowed the Zaitech manipulation and growing social inequality. His approach to wrangle the out-of-control borrowing and valuations was to aggressively hike the interest rate. By August of 1990, he had brought the interest rate up from 2.5% to 6%. He didn't just snap his fingers and make it so, though. This was yet another series of battles.

Before raising to 6%, he had already raised multiple times, bringing the rate to 5.25%. This was enough to cause the stock market to start sliding as borrowing became much more expensive. The housing market was holding, though, so Mieno was preparing another rate hike.

As I mentioned earlier, the central government cannot just tell the central bank to print money and hand it over so that the government can service debt. Things were not as cut and dry in Japan in the 80's and early 90's, though. The Bank of Japan was essentially a sub-agency of the Ministry of Finance, and the Ministry of Finance is part of the central government.

Japan's recovery after World War II is rightfully called an economic miracle. Japan went from complete devastation and exhaustion to one of the strongest economies in the world very rapidly. With the stock market and real estate market only going up in the 80's, the Japanese government found it overall easier to service its debt. The Ministry of Finance wanted to protect the miracle and also adhere to the promises made in the two Accords and was thus opposed to Mieno's plans. They viewed Mieno's plans as cavalier and unauthorized. However, Mieno believed it was the Bank of Japan's duty to stabilize the economy at all costs, even if it meant destroying markets.

To garner support, Mieno bypassed the Ministry of Finance and spoke straight to the populace through interviews. The people, furious from recent events, cheered him on. Although the Ministry of Finance attempted to politically pressure Mieno to cut rates, the Gulf War reminded Japan of the shock it felt twice in the 70s, and the Ministry of Finance relented. Mieno raised the interest rate to 6%. This, coupled with the Ministry of Finance's total volume controls (総量規制) which prevented banks from growing their real estate loan portfolios faster than their overall lending (implemented after the Ministry realized they could not control Mieno), was the coup de grace to the real estate market and the transition into a multi-decade economic depression.

The Lost Decade

Spoiler alert: "decade" ends up being plural. But for now, let's talk about the 90s. Okay, well a little more 80s first, and then the 90s.

With the rise in interest rates, companies were disincentivized to borrow, and thus the cyclical investing via Tekkin accounts slowed, share prices started dropping, and investors started losing money. The real estate market held out longer than the stock market, as speculative investors hung on to their properties, praying for a short-term market recovery. But in 1991, the government instituted the Land Value Tax (地価税) which levied an annual tax on anyone holding long-term leases on land in Japan, with a high basic deduction and special exemptions to exclude ordinary residential and essential-industry usage. This new expense on top of increasing losses from the stock market decline pushed corporations and real estate-flipping firms to sell properties to cover losses. However, due to the Ministry of Finance's total volume controls and potential buyers facing the same financial challenges as the sellers, no one was willing to buy real estate at its sky-high prices. Forced to sell to dump liabilities, real estate prices dropped over 70%.

In America, we'd take these companies back behind the barn, shoot them with the bankruptcy bullet, unemployment would skyrocket, and the government would reward bankers and CEOs with pillows made from tax-payer cash so that they can continue to sleep easy at night. There would be a sudden shock and then a gritty, disgruntled recovery complete with a movie and a couple of books over the next few years.

But no one remembers breadlines in a rundown Tokyo in the 90s or onward. Because that Tokyo never materialized. How could one of the world's largest economies lose trillions of US dollars-worth of money so quickly and keep a city like Tokyo safe, clean, and functional? Well, just simply have no bankruptcies, is how.

Instead of bankruptcies, Japan had zombies. Zombie banks and zombie companies. ゾンビ企業 (zombie kigyou), the companies were called. If major real estate companies or corporate clients defaulted on their loans, banks would have to eat the losses. Enough of this, and the banks would become insolvent. Tough cookies, we would say, except insolvency would reveal financial manipulation the banks were already facilitating to keep these dying companies alive.

Although the markets were generally booming until around 1990, the Black Monday crash of 1987 turned many increasingly-speculative investments of Zaitech branches into significant losses. If companies showed significant quarterly losses, they risked taking hits to their credit ratings which socially was a huge loss of face that would require banks to cut lines of credit. Tough cookies, my guy! But the issue was that so many companies held so much debt due to poorly-performing leveraged speculation that banks and brokerages would indeed become insolvent if many clients defaulted. To avoid this, the 飛ばし (tobashi; literally, blowing away; hiding bad debt) scheme emerged.

Companies would join a network with 2 or more other companies, with the others typically being meaningless subsidiaries or shell companies, sometimes even established abroad (cough, Olympus, cough). Before the company with huge losses would report financials, it would move its very-poorly-performing investments to the other companies by "selling" them at original purchase price. Selling is in quotes because companies had several ways to come up with the money their peer companies needed to buy the bad asset, but ultimately the required capital was circulated around the network until eventually making its way back to the owner of the bad investment. Ways to raise capital included selling bonds with stock-conversion promises in international markets, using a company's own supply of cash if available, or simply issuing promisory notes (IOUs). There was one more way, the most dubious, which was taking out a loan to pay for the asset transfer.

The companies in the network would intentionally have different fiscal calendars so they report financials at different times throughout the year. Reporting rules did not require the main company to consolidate financial reports from all of its companies during reporting. So, bad assets could be moved around strategically in a way that didn't trigger reporting rules for the holder at the time, and ultimately this debt burning a hole in the holder's pocket stayed hidden from auditors.

Banks and brokerages would facilitate hiding massive debt? What if the Ministry of Finance found out? In fact, the Ministry of Finance already knew and was complicit. Of course, they could not openly admit to this, and they surely wouldn't outline the behavior in any documented policy. But investigations later revealed that the Ministry of Finance indicated to large banks and brokerages that they would turn a blind eye to maneuvers used to hide large losses from company balance sheets. The Ministry of Finance simply would not allow a bank or brokerage to fail. This wasn't new, had been the public's understanding since rebuilding after World War II, under a policy called 護送船団方式 (the convoy system). This policy worked for a long time, allowing all financial institutions to enjoy profits for decades at the expense of completely removing free-market competition.

The Ministry of Finance assumed that the economic trouble brewing in the mid 80s was going to be short-lived. Perhaps, if they could hide the massive debt long enough, the market would recover and the debts would naturally resolve themselves. As we know, the situation was not short-lived.

To complicate matters, the Basel I Accords (enforced in 1992, established in 1988) placed restrictions on how much immediately-available capital banks must keep if offering loans internationally. In particular, it was 8 cents to every 1 dollar of risky loans or risky assets owned, where "risky" was determined by a scoring system we won't get into. And by this time, Japanese banks held plenty of risky loans or assets.

The pressure was mounting to keep the lid on the massive debt circulation, not just hidden away from the domestic eye but increasingly the global one as well. The economic miracle was not coming, so tobashi schemes continued to grow in scope to hide even more bad corporate debt.

Now, a zombie company is one that is effectively bankrupt but never officially said to be bankrupt. A company is bankrupt if it cannot pay its debts. In addition to debts in the form of Zaitech losses on speculative investing, there was also the straightforward debt owed to banks as interest on loans. Often, real estate was used as collateral, and with the real estate market collapse, banks and brokerages wouldn't be able to cover their losses on defaulted payments even if they seized and sold the collateral. For banks to avoid their clients defaulting and thus exposing their own bad loans, the banks started evergreen lending. This was called by various names in Japanese, but we'll refer to it using the colloquial name ゾンビ貸し付け (zombie loans).

Say a company owned 1 million yen in interest on a loan but it could not pay it. A bank would just create a 1-million-yen loan, credit it to the client on paper, and then immediately debit the client on paper. Thus, the bank records the year's due interest being paid off and a 1-million-yen profit. The company is just further in debt, though. When real money needed to be moved, banks would use their own capital, loans from the Bank of Japan, or even reallocate individuals' savings from other low-risk domestic investments.

Zombie banks were those that were technically insolvent but functionally still alive. What with the convoy system, banks increasingly made riskier loans under the assumption the banks themselves could never fail. As it became clear that more and more of the loans were non-performing, banks slowly lost the ability to lend to healthier--potentially more productive or just newer--firms. What loans these banks did make were to support the tobashi scheme and evergreen lending of stagnating and unproductive companies. Technically speaking, zombie banks predated zombie companies. In either case, this dynamic contributed to economic paralysis.

Come 1993, corporations realized the economic crisis will be prolonged. It was the custom at that time to hire employees for lifelong careers, and with the bleak economic landscape, this was no longer appealing to struggling companies. Japan entered what is called the 就職氷河期 (shushoku hyoukaki, literally the finding-work ice age). Companies simply stopped hiring college graduates into salaried positions. In the late 80s, the フリーター (freeter, a young person living off of part-time work) phenomenon arose with the generally-positive connotation of a self-directed career in work other than lifelong salaried positions, but the connotation changed as employment opportunity collapsed and people were increasingly relegated to this lifestyle. The number of 引きこもり (hikikomori, a person who has withdrawn from society) increased as well, sparked at this time by psychological shame or societal pressure related to not attaining the traditional middle-class life, although the term itself was not officially coined until Saitou Tamaki introduced it in 1998. This employment stall affected an entire generation of young men and women.

Young men could no longer secure the stable, long-term salaried positions typical of the traditional middle class. With this came a reduction in marriage rate. Those that did marry did so significantly later on average than previous generations. The birth rate also (further) dropped, attributed to delayed marriage and not necessarily a disinterest in having children.

With fewer people stably employed after college, consumer spending power dropped, and the economy entered a self-reinforcing deflationary period. Demand dropped, so prices dropped as well, but demand didn't soon recover. With less money to spend and the fact that goods at that time would likely be cheaper a few months from then, consumers held off on big purchases, further weakening the economy. Simultaneously, cheap, imported goods from Southeast Asia were entering the Japanese economy, and domestic companies struggled to keep up without reducing prices or cutting wages.

What about the blue-collar workers? It was still illegal to allow unskilled migration, but Japan was still suffering a blue-collar labor shortage. The Technical Intern Training Program (TITP) was established in 1993, sold as an international contribution that would transfer useful skills to developing nations by training their workers. In practice, it functioned as a backdoor guest-worker program to import more foreign, unskilled labor into Japan. Laborer's visas were tied to a single company, meaning there was no job mobility, and this power imbalance between employer and employee many times led to the typical wage-theft and long-hour exploitation common in these schemes. Workers were classified as interns rather than full-time employees and so had fewer rights in general.

Communities of migrants formed, particularly in regional manufacturing towns, which naturally resulted in integration issues, social segregation due to cultural differences and language barriers. A grassroots term, 多文化共生 (multicultural coexistence), arose, describing local initiatives to help school and integrate foreign children.

You didn't just apply to TITP and get let into Japan. Foreign countries, particularly China, Indonesia, the Philippines, and Vietnam, housed sending companies which would arrange personnel transfer with TITP representatives in Japan. The transferee needed to pay a fee to join the program, and so many transferees arrived with immediate debt. Over time, the government coopted the "multicultural coexistence" term, and its connotation became muddled with images of calling legally-dubious low-skilled immigration by a kinder name, with images of local harmony, making it an emotional and social matter rather than one of political accountability.

Back to the economy, things further erupted when Thailand unpinned the bhat from the US dollar and let it float, causing the Asian financial crisis of 1997. Japanese banks had massive lending portfolios in Southeast Asia and so were affected. The crisis caused a cascade of bank failures, starting with Sanyo Securities. Yamaichi Securities, one of Japan's "big four" financial institutions at the time, voluntarily shut down, revealing over 200 billion yen of losses it was hiding in tobashi schemes. The government had to step in and temporarily nationalize other large lenders. International markets charged Japanese banks higher interest rates to borrow as faith eroded. Banks further slowed their domestic lending, contributing to more corporate bankruptcies.

Up until this time, the Ministry of Finance was revered as one of the bright, guiding hands of the nation. Politicians went around saying, "blah blah blah," and the top graduates of Tokyo University's Law School quietly pushed the right buttons and pulled the corresponding levers behind the scenes at the Ministry of Finance to keep the nation running, was the image in the public eye. But the fraud revelations in Yamaichi Securities' shutdown triggered surprise government raids on the Ministry of Finance in 1998. These raids uncovered deep corruption, such as officials being bribed with expensive gifts, clubbing, even dining at exorbitant shabu-shabu restaurants where the short-skirted waitresses wore no underwear. Many times these bribes were facilitated by special corporate departments that existed solely to "handle" officials from the Ministry. In exchange, officials leaked confidential audit schedules, facilitating the hiding of toxic debt. It was common for officials in the Ministry of Finance to retire and take high-level advisory roles at the very institutions they were supposed to regulate, so there was an obvious conflict of interest: don't regulate them now, and in return get rich later.

Suffice to say, the struggling public was furious. Many officials were arrested or forced into early retirement, with some even taking their own lives. And when I say arrested, I don't mean jailed. If anyone was jailed, it was only up to 5 years. Most sentences were suspended, meaning they were replaced with threats of jail if the accused did not demonstrate good behavior. The image of the Ministry of Finance was forever tarnished in the public eye. The Bank of Japan was similarly raided. Around the same time, the 1997 Bank of Japan Act came into full legal effect, which removed the Ministry's power over the Bank of Japan. Up until now, the Ministry could simply fire the governor or deputy governors of the Bank of Japan over policy disagreements, which sheds light on why Mieno appealed directly to the people instead of going through the Ministry.

The Financial Services Agency (FSA) would later clean up the banking system further in the early 2000s.

To prevent a full collapse of the entire national banking system, the Bank of Japan dropped the country's benchmark interest rate to 0% in something called the Zero Interest Rate Policy (ZIRP). The benchmark rate would stay at 0% for the next 15 years. It was a signal to global markets that Japan could not survive normal market behavior at present. This low rate made the yen a currency of choice for international speculative traders who performed interest rate differential trades, etc., with it.

The suicide rate in Japan has been higher on average than that of other first-world countries across the decades. From the 60s to the 80s, it was roughly 20,000 people per year, increasing slightly in the 80s due to growing economic issues. By the end of the 90s, it was around 33,000. It was more common across these decades for older people to commit suicide. In the late 90s, though, it was slowly becoming more common for younger people to take their lives, another effect of the economic hardships the bubble brought about.

"The Lost Decade." Just what was lost? The word does not imply the specific loss of any one thing. I would sum it up as the loss of future potential. The decisions made in this decade sacrified the productivity and innovation of the country and also sacrified an entire generation entering the workforce and preparing to start families. The effects of the decisions made in this era still influence Japanese society and psychology to this day.

Structural Reform

In 2001, Koizumi Junichiro became the Prime Minister. He axed the convoy system and replaced it with an American-style neoliberal capitalist approach. His slogan was, "no structural reform, no economic recovery."

Banks were forced to write off their bad debt, ending the zombie bank outbreak. However, this also dragged many zombie companies into the light, forcing them to finish their metamorphosis, not into butterflies but into bankruptcy. Unemployment rose to a then-record 5.4% in 2002.

Koizumi succeeded in privatizing the Japan Post. This was significant because, despite the name, the Post was not just for mail but also managed peoples' savings accounts, totaling over 3 trillion US dollars in assets under management. The Liberal Democratic Party (LDP)--Koizumi's own party--would allocate the Japan Post's savings pools to fund infrastructure projects in rural areas in exchange for votes. This is not immediately related to the topic of this post but is a change in domestic political behavior and therefore economic development I feel is worth mentioning.

Through 2004, Koizumi pushed massive labor deregulation with one change being that companies were legally allowed to hire "non-regular workers," 派遣社員 (haken staff). Lifelong salaried employees are in ways a liability to companies, so companies used this opportunity to stop bringing new hires on as such and instead hire them as contractors with generally lower benefits all around, including the possibility of being fired at a moment's notice. By 2007, over one third of the entire Japanese workforce was non-regular workers, a major shift from tradition. This was a source of significant psychological anxiety.

In 2008, the Lehman Shock caused Japan's GDP to suffer more than that of America's. Still dependent on auto and electronics exports, as importers' economies slid into recession, Japan's sales plummeted yet again. Factories and automakers downsized their operations and fired many haken staff. There was a time when hundreds of homeless workers set up a tent city in Hibiya Park, in the line of sight of the Ministry of Health, Labour, and Welfare, to send a clear message that social safety nets had disappeared.

So about that "no breadlines" thing I mentioned earlier, there were in fact people lined up for food, right in the heart of Tokyo, but this first required realized bankruptcies and changes to labor laws. When we think of small communities in parks that visibly stand out in Japan nowadays, we think of those of foreigners. But these were mostly Japanese people. Whether or not this all could have been avoided had Japan succeeded in becoming less export dependent is unknown, but particularly brutal is that this outcome looks like the rip-the-bandage-off approach, but it came after a prolonged domestic economic crisis. The worst of both worlds.

I didn't mention this earlier, but in the 90's, in addition to TITP, the government also created specialized work visas for Nikkeijin, in this case second or third generation descendents of Japanese emigrants who moved to South America, largely Brazil. The play was to bring these people into Japan to work blue-collar jobs. Many of these people did not speak Japanese and were not culturally Japanese, but the hand-wave was that because they were ethnically Japanese, they would fit in more naturally. Well, with the firing of the haken staff came the mass layoffs of the South American Nikkeijin as well, but in their case, the government offered a pay-to-go plan. The deal was, such a person would be paid 300,000 yen and a plane ticket to return to their home country. They'd be paid 200,000 yen for each dependent. They also agreed that, if they took the deal, they would never reenter Japan on their long-term visa.

The Lehman Shock caused the US Federal Reserve and the European Central Bank to cut their own interest rates to 0 and print tons of money to survive the crash. Hedge funds were borrowing yen to perform carry trades and invest in other countries' securities with higher interest rates. As the interest rates fell, these investors needed to sell while they still could to pay off their debts to Japan. They converted whatever currency they were investing with back to yen, causing the demand for yen to increase, drivng up the strength of the yen until it had become 75 yen to 1 US dollar in 2011. This destroyed Japanese export performance in foreign markets.

Abenomics

In 2012, Abe Shinzo became Prime Minister of Japan, promising to break the deflationary cycle. In 2013, he appointed Kuroda Haruhiko as the Governor of the Bank of Japan. Desperate times call for desperate measures, and Kuroda went full-send, implementing Quantitative and Qualitative Monetary Easing (QQE).

The promise was to reach a stable inflation rate of 2%. This would encourage people and companies to invest and spend instead of just save their money in bank accounts.

Up until now, when I have talked about interest rates, it has always been the short-term ("overnight") interest rate the central bank sets on loans to financial institutions and the interest rate on short-term bonds. However, a bond's coupon increases with maturity. The longer an invester locks up their money, the higher the risk a better opportunity may present itself along the way, and thus a higher interest rate is required to incentivize the investor to commit.

Also, until now, I have suggested that government bonds are only sold once, from the government to a buyer. In fact, government bonds can be sold any number of times in the secondary bond market. The coupon is fixed no matter how many times the bond is sold, but if someone sells a bond, presumably they were not happy with the coupon and so wanted to dump the bond. To incentivize someone else to buy the bond, the seller needs to adjust the market price of the bond. The interest on the bond the new buyer receives is called the yield. The yield and market price are related like this.

yield = coupon / market_value

The "yield curve" is the plot of bond yield vs. maturity. The longer the maturity, the higher the yield. In secondary markets, people talk almost exclusively about bond yield, not coupon.

When I said earlier that Japan's interest rate was 0% at this time, I was talking about the short-term interest rate. The longer-term government bonds had rates higher than 0.

QQE ignored the short-term interest rate and targeted the long-term bond interest rate. The goals were to expand the amount of money in circulation, have the Bank of Japan buy government bonds with 7+ years of maturity from the secondary market, and also directly buy exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs) in the stock market.

QQE exapnded the money supply by creating new yen to buy bonds with. Indeed, in just over two years, the Bank of Japan doubled the currency in circulation. By also buying securities--riskier assets--directly in the stock market, the Bank created a price floor for the securities. Investors were thus willing to pay more to get access to the exact same corporate earnings, demanding a lower risk premium. Finally, the injection of new yen diluted the supply of yen globally, and in combination with the Bank of Japan buying a fixed yen-amount of government bonds per year to reduce longer-term yields, made Japanese government bonds and the yen less internationally attractive, weaker. The weaker yen boosted sales of exports, bringing big profits to large companies like Toyota and Sony.

By 2015, the yen had depreciated from 75 yen to 1 US dollar to about 120-to-1.

Nonetheless, the domestic economy couldn't quite hit the 2% inflation goal. People and businesses were reluctant to spend cash given the recent deflation. They were also reluctant to borrow money and instead simply saved or paid off existing debts. Even if people did borrow, banks were not necessarily eager to make loans at such low interest rates. On top of that, the Bank of Japan was paying banks 0.1% interest on excess cash, so banks were incentivized to hold cash and make a completely safe, if not small, profit.

Other circumstances complicated matters. In 2014, Japan raised its own consumption tax from 5% to 8% to help pay off its large national debt. This created a temporary spike in consumer spending, as people rushed to beat the tax hike. But then the higher tax rate reduced real wages and further disincentivized people from spending. In 2015, China's stock market crashed, and Japan lost a lot of export sales to China at this time. Also, the US shale boom in 2014 and 2015 brought oil prices from $100 to $30. I won't go into detail, but this also dragged Japanese inflation downward.

Unable to catch a break, Kuroda pulled a switcheroo and slapped a negative sign on the 0.1% interest the Bank of Japan paid banks for excess cash. The short-term interest rate was now -0.1%, meaning banks lost money on excess cash they did not lend out. Enter the Negative Interest Rate Policy (NIRP). This did help lower borrowing costs and also flatten the yield curve on longer-term bonds, but things are never so easy. Banks could not charge normal investors negative interest rates, for fear of a run on the banks. And with such low government bond rates, they were barely making any profits. Peoples' distrust of the financial machine weakened, and many started keeping cash at home in safes, for fear of eventually having to pay to keep their money in banks. As it turns out, life insurance companies and pension funds relied heavily on government bond yields to meet long-term payouts to retirees. These institutional investors were also struggling. The basic business model of banking and ("safe") institutional investing relies on a non-flat yield curve.

Before moving on, let us again touch on the societal impact and immigrant labor. Abe's growth-oriented policies generated millions of new jobs. Although large companies often hoarded the cash, many low-cost, part-time jobs were created. For example, with exports doing better, even large companies needed cheaper, flexible labor to satisfy handling the increased volume of exports. Tourism was also increasing year over year, and many part-time jobs were created by way of this. Also, for example, the "2020" Olympics was approaching, and Japan needed manual laborers to build the facilities.

With fewer younger people and more and more people retiring, Japan simply ran out of domestic hands to do the jobs. Thus, immigrant labor through TITP continued to increase. At the same time, so did international condemnation of the Japanese government's treatment of these laborers.

The labor crisis was so sever that Japan reversed its no-reentry policy for South American Nikkeiji in 2013, allowing them to come back (to work, of course), should they so choose. This was also prompted by growing international criticism of Japan's previous restriction on their reentry.

Basic laws of economics suggest that high labor demand and a worker shortage would mean higher wages, to incentivize workers to select one employer over another. However, the labor shortage pulled retirees and homemakers into the workforce, typically as part-time laborers. Even if companies did increase the wages of some workers, the influx of many lower-paid workers brought the average back down. With the introduction of the haken staff role and the reduction in job stability in the "lost decades," labor unions shifted from petitioning for higher wages to simply lobbying for job security, and this became the new unspoken agreement. Finally, of the many jobs created under Abenomics, most were not in the high-productivity tech sectors, where workers can leverage advancements in technology for productivity gains. Wages are ultimately tied to economic productivity, but most of the domestic labor growth was in low-margin industries such as elderly care, hospitality, retail, construction, and domestic logistics. These industries cannot easily pass higher costs onto price-discriminating consumers, limiting employers' abilities to raise wages.

Nominal wages did at times see increases, but real wages went negative or were stagnant at best, as the weak yen reduced purchasing power. Working hours increased, but personal wealth did not. As suggested earlier, homemakers were also brought into the workforce. A core pillar of Abenomics was "womenomics," with goals to get 74% of the eligible-to-work female population into the workforce, 30% of corporate leadership and management positions staffed by women, and increase daycare availability to allow mothers to return to work. While the leadership goals haven't been achieved, the government did create more daycares and surpassed the 74% participation goal, with more women in the workforce proportionally than the US or Europe. With that said, strict tax laws that exist to this day would penalize dual-income families if the second earner made over somewhere around 1 million yen (around $6,500 US dollars at the time of this writing), having women intentionally opt to work part-time jobs with lower hours so as to not lose tax advantages.

Yield Curve Control

YCC is also part of Abenomics, in fact part of QQE, but I decided to give YCC its own section because it is the last milestone in our journey, leading us to the era of the time of this writing.

It was clear the negative short-term interest rate couldn't last, and another crisis in banking and even pensions was imminent. Only 8 months after the introduction of negative interest rates, Kuroda introduced Yield Curve Control (YCC).

Until now, the Bank of Japan was buying tons of government bonds. So many, in fact, that the Bank eventually came to hold over 50% of all issued government bonds, over 575 trillion yen's-worth. The more bonds the Bank held, the fewer bonds were traded in the market, limiting natural market forces and price discovery. The more limited natural market forces became, the less effective buying an additional government bond became at raising inflation.

QQE until now focused on the quantity of money, but YCC shifted focus to the price of money. Instead of actually buying government bonds, the Bank of Japan vowed to buy as many bonds as it needed to in order to pin the rate of the 10-year government bond to 0%. This was largely a psychological play. It turned out that the Bank actually bought fewer bonds in the YCC period because investors knew the Bank, which can print whatever money it needs, was capable of buying an infinite number of bonds, and thus the threat of its promise was real. This achieved the same market-stimulative effect as QQE with much less bond-buying.

The bank owned so many government bonds that there were days when not a single 10-year bond was sold on secondary markets. Also, as the focus was only on 10-year bonds, leaving 8 and 9-year bonds uncapped, the yield curve has an unnatural kink in it.

The policy was generally working, but the Bank needed a way to relinquish price control back to the market without shocking the economy. It did so by widening the 10-year government bond price target over a period of years. In 2018, the Bank widened it to about +0.2%, and then to +0.25% in 2021. COVID came along and resulted in the US Federal Reserve raising its interest rates in 2022 as a result of supply-side shock. International investors bet that Japan would need to do the same and so started shorting (betting against) the 10-year government bond rates by selling off tons of bonds to get the Bank's guaranteed purchase before the bonds' market prices dropped and also by buying futures (the latter I won't go into here).

In fact, it was the economic aftermath of COVID that finally pushed Japan's inflation rate above 2%. Ironically, years of artificial price manipluation via QQE and YCC struggled to move the inflation rate, but the global economic shock of COVID boosted inflation in a matter of months. However, Japan had been targeting "good inflation," which is increases in prices due to rising domestic wages. Instead, it got "bad inflation," which is increases in prices corresponding to increased costs of goods, which in Japan are heavily tied to imports.

In early 2022, the yen was about 115 to 1 US dollar. By October, it was about 150 to 1. Why? Well, once again, the imbalance in loan rates across countries facilitated an interest rate differential trade. This era's trade is known as the Yen Carry Trade. Investors borrowed yen for cheap in Japan and invested in high-interest US government bonds and other higher-yielding securities.

The Ministry of Finance even needed to step in to stop the yen's freefall. They used foreign reserves, selling dollars, to buy 9 trillion yen.

Indeed, in 2022, the Bank widened the government bond yield gap to +0.5%. In 2023 they widened the band to a 1% ceiling and then later removed the ceiling entirely. These retreats allowed yields in the bond market to return to more organically values determined by the market. In March 2024, Japan formally ended YCC (and thus QQE), NIRP, and the Bank's purchase of securities in the domestic stock market. To this day, the Bank is slowly but steadily selling off its securities.

For 30 years, major Japanese companies were increasing offshoring to insulate themselves from the economic shocks of the highly import-dependent Japanese economy and work around rising costs of exports whenever the yen happened to be strong. This phenomenon was called the industrial hollowing-out (空洞化) and started around the time of the Plaza Accord back in 1985. With COVID having disrupted supply chains from China, Japanese companies further diversified across Southeast Asia and also the US in what is called "friendshoring," with Japan selecting "like-minded countries" (同志国).

The crash of the yen in 2022 also triggered onshoring. The famous Lean Manufacturing and Just-in-Time Logistics pioneered by Toyota, which bought and stocked only what was needed to produce a line of product, shifted from just-in-time to just-in-case. Big companies started keeping surpluses of goods to pave over price swings in unpredictable markets. Companies like Shiseido, Panasonic, and Fast Retailing (the owner of Uniqlo) drafted plans to bring production of their higher-value product lines back to Japanese factories. Semiconductor companies (both Japanese and international), with government-backed funding, have been building foundries in Japan once again.

Let's take one last poke at the immigration and societal angle before wrapping up. In 2012, Japan saw about 8 million tourists yearly. By 2019, the number had ballooned to 31 million per year. This changed the social and economic fabric of places like Tokyo and Kyoto, with large sources of revenue now coming from tourism. Service and hospitality jobs boomed. By 2019, there were estimated to be 169 jobs for every 100 people. In other words, the labor shortage persisted. Cumulatively, over 400,000 "interns" had come to Japan by way of the TITP. In the same year, Japan introduced the Specified Skilled Worker (SSW) visa which gave laborers a legal pathway to become permanent residents.

Today

Many challenges remain, but several economic scourges have finally been wrangled. The era of free money by way of negative or zero interest rates is over. Real wages are turning positive as (some) nominal wages have been rising over 3% each year, outpacing inflation. And yes, there is inflation now, by way of companies passing rising costs on to customers. Inflation currently sits at about 1.7% with the core consumer price index at around 2%. As noted earlier, more onshoring is happening, and companies are pursuing more automation with their capital. With rising interest rates, banks are finally able to make their profits organically, with variable, positive interest rates. Japanese households now generally lose purchasing power by keeping money in banks, most of which offer a very low interest rate in Japan, and so are encouraged to invest more to hedge against inflation.

Nonetheless, the broader economy remains highly import-dependent. Fluctuations in import prices, particularly that of oil lately, can still disrupt Japan. The rising real wages are only currently realized by a small percent of the workforce, less than about 20%. For those whose wages are not rising, inflation is slowly making their daily life more expensive. The labor shortage remains, and while the government is extending the maximum period of stay for select skilled worker visa types, Japan is also raising the requirements to become a permanent resident. Increased immigration is often met with skepticism around successful social integration with concerns over cultural dilution and social clashes with large groups of people that may simply refuse to assimilate. Immigration, coupled with Japan's ever-declining birthrate, does raise questions about how the demographics and daily life in Japan will differ from now after some generations.

The yen is still weak compared to the dollar. However, coincidentally, as I was writing this post, the US bought $50 billion US dollars-worth of yen to combat short sellers. The reality is that Japan still owns a ton of US government bonds, and if Japan needed to sell US bonds to protect the yen, this would disrupt the US economy in ways we have already outlined in this post. This prompted the US currency intervention. Japan and the US are expecting a Japan interest rate hike to about 1.25% by the Fall.

Inflation is anticpated to reach 2%, even 3%, over the next year as import costs remain high and companies get used to passing price increases along to customers. It is therefore unlikely that we will see the pre-COVID 110-yen-to-1-US-dollar rate anytime soon.

Tomorrow

I started the investigation into the price history and performance of the yen somewhat serendipitously. But on the back of my mind was the topic of my previous post, about the declining birthrate of Japan. The question I ask myself is, how much of a contributor is the economic uncertainty and tumultuous yen in Japan's declining birthrates? It is certainly one of the causes, but it is by no means the smoking gun, nor is it necessarily among the strongest. I need to investigate more. The more stable the economy and the more individual wealth one has, the less financial uncertainty there is about the future. But other first-world countries have shown that, while it's common to say "kids are too expensive," increased wealth doesn't seem to lead to increased childbearing. That, and relatively poorer countries have higher birthrates, although the perception of childbearing in those societies is also different, along with the economies themselves.

It's telling to note that Japan's birthrate fell below replacement level in 1974. After the wartime boom, there was a sudden TFR collapse from around 4.5 in 1947 to about replacement level in 1957. After the generation of the previous baby boom had children, causing a temporary jump in TFR, the TFR has steadily declined since 1974.

The Japanese middle class grew in size and wealth through the 1970s as more people became lifetime employees. The asset bubble of the 80s and early 90s also made previous land and securities holders as well as successful speculators very wealthy, before the crash. After the bubble popped, most massive gains in wealth stayed inside companies, not making their way to consumers. But even in the times of economic prosperity and boom, the TFR did not increase. In fact, the decline accelerated, prompted by the increased cost of living, increasing work hours, and the opportunity cost for educated women choosing children over career.

There was a time when TFR grew slightly, in the decade from about 2005 to 2015, but this was due to targeted state intervention and not macroeconomics. Abenomics and COVID reversed this trend, though.

It appears that neither corporate wealth generation nor a period of national financial success do anything to encourage Japanese people to have kids. So what would? Are the biggest causes as fickle and tied to international trends as the Japanese economy has been? The search continues.