Rebecca's World: Early Modern to Modern Era - Reflationists vs. Austerity Advocates: Shigehide Ogiwara vs. Hakuseki Arai Vol. 20

Chapter 20: The Return to a 'World with Interest Rates' and the Current State of Structural Reform

1. The Horizon After 30 Years and the Quietly Opened Door of History

The frozen common sense that had long blanketed the Japanese economy—that 'interest rates are zero' and 'prices and wages do not move'—was finally about to crumble with a roar.
Spring 2024 (Reiwa 6).

At the Bank of Japan headquarters in Nihonbashi, Tokyo, where cherry blossoms were in full bloom.

Governor Kazuo Ueda, who took the baton from former Governor Haruhiko Kuroda—who had led the Bank of Japan for 11 years through an unprecedented 'massive monetary easing experiment'—made a quiet but historic decision.

The lifting of the negative interest rate policy and the abolition of Yield Curve Control.

The extraordinary negative interest rate policy that had been in place since 2016 ended, and the Japanese economy steered toward its first interest rate hike in 17 years.

It was a historic moment as Japan stepped out of the massive safety net of 'extraordinary monetary easing'—the first arrow of Abenomics—and began walking once again into a 'normal economic world with interest rates.'

Rebecca Walker wrote down the scene of the Bank of Japan press conference and the Nikkei Stock Average chart, which had broken through the 40,000-yen mark for the first time in 34 years, surpassing the bubble-era peak of 1989, in her notebook and exhaled with deep emotion.

Rebecca: '...It is a breathtaking turning point in history. Abenomics, which began in Chapter 17, the massive fiscal spending during the COVID-19 shock in Chapter 18, and the global inflation caused by the Ukraine crisis in Chapter 19... After various trials, Japan has finally completely escaped the 'darkness of deflation' and returned to a 'world where interest rates exist.'

Amaterasu Omikami stood up from her throne, looked down at the Japanese cities lined with modern skyscrapers, and nodded deeply.

Amaterasu Omikami: 'Indeed. Although it was pushed by the 'external pressure' of a historic weak yen exceeding 150 yen to the dollar and high resource prices, the interest rates, prices, and wages that are the bloodstream of the Japanese economy have finally begun to move powerfully. The fact that the Nikkei Stock Average surpassed its bubble-era peak was a symbolic event that showed domestic and foreign investors' expectations for 'Japan's revival.'

Rebecca: 'Yes. But Amaterasu Omikami... the return to a 'world with interest rates' is not just the beginning of joy. It is also the start of the second act of harsh structural reform, where the true strength of the Japanese economy, which has been protected by the 'lukewarm water' of ultra-low interest rates, will be tested!'

Amaterasu Omikami: 'That is exactly right. How will companies and the nation survive in a world where the 'cost' of interest rates arises once again? Rebecca, decipher the front lines of the ongoing structural reform from the records in your notebook.'

In the sky, the records of the struggles of companies, households, and the nation, shaken by the transformation after 30 years, were vividly projected.

2. The Light and Shadow Cast by a 'World with Interest Rates'

Rebecca opened her notebook and began to organize the dramatic structural changes that the revival of interest rates had brought to the Japanese economy.

Rebecca: 'The revival of interest rates is bringing both light and shadow to various parts of the economy simultaneously. First, the 'light' aspect. For depositors and financial institutions like banks, which had been deprived of interest income by zero interest rates for many years, the recovery of normal interest rate levels leads to increased profits and higher interest income for households. Also, with the revival of the 'price discovery function' of interest rates, capital will be correctly allocated from companies without earning power to growth industries.'

Amaterasu Omikami: 'So, the market's inherent metabolism will begin, where 'zombie companies' that survived in lukewarm water are weeded out, and talent and funds gather in truly highly productive companies.'

Rebecca: 'Yes. But at the same time, a fierce 'shadow' of risk is rushing in.'

• Increase in SME bankruptcies: Weak small and medium-sized enterprises that had kept their operations afloat with ultra-low interest rates and 'zero-zero loans' during the COVID-19 pandemic are being forced into bankruptcy or closure one after another, unable to withstand rising interest rates and soaring labor costs due to labor shortages.

• Household mortgage burden: Many generations who took out mortgages with variable interest rates are facing the reality of increased repayment amounts due to rising interest rates.

• The nation's massive interest payment costs: For the Japanese government, which has over 1,000 trillion yen in outstanding government bonds, even a mere 1% rise in interest rates will put pressure on national finances with an increase in interest payments on the scale of trillions of yen in the future.'

Amaterasu Omikami: 'With the end of the era of 'money that can be borrowed for free,' all economic entities—the nation, companies, and households—are being forced into strict management that takes the 'cost of interest rates' into account.'

3. The 'Quiet Emergency' of Labor Shortages and Investment in People

In the sky of Takamagahara, 'Help Wanted' signs posted at construction sites, factories, and restaurants across the country, along with graphs showing the rapidly advancing population decline, were projected in large scale.

Rebecca: 'And now, the biggest structural problem shaking the Japanese economy to its core is the 'severe labor shortage.' As the declining birthrate and aging population progress to the extreme and the working-age population rapidly decreases, the cry of 'not enough people' is echoing across every industry.'

Amaterasu Omikami: 'In the 'lost 30 years' of the past, the biggest challenge was 'protecting employment (preventing layoffs).' But now, a tectonic shift has occurred toward 'how to secure excellent talent.'

Rebecca: 'That is correct! Because of this, a dramatic change has occurred in the Japanese labor market. To attract workers, companies have been forced to carry out 'significant wage increases,' which they had refused to do for 30 years. Companies that cannot respond to wage increases are unable to attract people, and 'labor shortage bankruptcies,' where businesses cannot continue, are surging.'

Amaterasu Omikami: 'Companies that cannot raise wages are weeded out, and workers move to high-value-added companies that can pay high wages. The fluidization of the labor market and 'investment in people' are being pushed forward semi-forcibly.'

Rebecca: 'Yes. The words that the late former Prime Minister Shinzo Abe spoke passionately during his lifetime about the importance of labor market reform and wage increases are becoming reality.

'The key factor for creating a virtuous economic cycle is undoubtedly 'wage increases.' Companies must not hoard the cash they earn, but must invest in the 'people' who will carry the future.'

'Wages rise, consumption grows, and companies prosper as a result. Restoring this natural virtuous cycle is the true goal of escaping deflation.'

Now, Japanese companies are facing the trial of true reform, where they cannot survive if they neglect 'investment in people.'

4. The Trump Card for Growth—DX, GX, and Economic Security

The image in Takamagahara switched to the cutting-edge TSMC Kumamoto plant, massive data centers, and renewable energy sites.

Rebecca: 'To overcome the double punch of labor shortages and rising interest rates and for Japan to grow again, three massive structural investments are being rapidly promoted.'

• DX (Digital Transformation): To make up for the delay in digitalization exposed in Chapter 18, the use of generative AI and DX investment by the government and companies are expanding explosively. Labor saving and productivity improvement are the only ways to resolve labor shortages.

• GX (Green Transformation): Toward the transition to a decarbonized society, the public and private sectors are pushing forward with investments on the scale of 150 trillion yen, aiming to improve energy self-sufficiency and create new environmental industries.'

• Economic Security and Domestic Investment: As symbolized by TSMC's expansion into Kumamoto, government subsidies are acting as a catalyst for the construction of manufacturing bases for cutting-edge semiconductors and essential goods one after another within Japan.

Amaterasu Omikami: "Factories and investments that had fled overseas are returning to the Japanese archipelago, seeking a cheaper Japan, high technical capabilities, and geopolitical stability."

5. The End of the 'Lost 30 Years' and the Question of True Independence

Rebecca slowly closed her notebook and looked straight at Amaterasu Omikami.

Rebecca: "...Amaterasu Omikami. The tumultuous history of the Japanese economy that we have traced since Chapter 1. From the fiscal reforms of the Edo period to the modernization of the Meiji era, postwar reconstruction, high economic growth, the bursting of the bubble, the darkness of deflation, and the trials of the pandemic and inflation... Now, Japan has emerged from the long tunnel of the 'Lost 30 Years' and has clearly stepped into a new era."

Amaterasu Omikami: "Indeed. You are escaping the 'disease of deflation.' But Rebecca, this 'world with inflation and interest rates' that Japan has obtained is not a natural prosperity like the high economic growth period of the past. It is a steep path that you must continue to walk on your own feet while bearing the heavy burden of a declining population."

Rebecca: "Yes. The normalization of a massive fiscal policy reliant on government bonds, the reform of ever-expanding social security costs, and 'continuous growth in real wages' that can withstand rising prices... The challenges are piling up. However, Japan, having regained a 'dynamic economy' where prices move, interest rates move, and wages move, is once again filling with the energy to carve out its own future."

6. From the Current State of Reform to What Lies Beyond

As Amaterasu Omikami poured powerful light from the divine throne, the heat enveloping modern Japan and the resilient figures of the people living in the coming era spread throughout the space of Takamagahara.

Amaterasu Omikami: "...That was a brilliant analysis, Rebecca. A 'world with interest rates' is a harsh world that rewards those who take on challenges and eliminates those who stagnate. But the people of this country, who have overcome trials, will surely be able to turn this turning point into the fuel for new prosperity."

Rebecca: "Yes! With the lessons left by the great figures of the past in our hearts, the Japanese economy is now standing at the very forefront of the modern era, where its 'true strength' is being tested!"

In the eyes of Rebecca, who held her notebook tightly to her chest, the pathos of deflation she had once seen had vanished, reflecting Japan's strong determination to challenge the future by riding the wave of change for the first time in 30 years.

Amaterasu Omikami: "Good! I have witnessed the end of deflation and the beginning of a 'world with interest rates.' But the story does not end here. The world is now heading toward an 'unknown wilderness' of the explosion of the AI revolution and a global economy that is becoming fragmented. ...Let us proceed to the next chapter, Chapter 21! 'The Impact of the AI Revolution and the Future of Digital Economic Hegemony'!"

The space of the shrine was filled with new light, and the dialogue between Rebecca and Amaterasu Omikami, carrying the lessons of history, continued powerfully toward the next unknown future.