When interest rates are too low.

Author:Nakamae, Tadashi

As the Japanese economy continues to shift away from manufacturing industries, it should more closely align itself with capital-intensive, highly productive non-manufacturing industries that will generate the greatest value for the overall economy. Japan is well-positioned to start this structural transformation because its services industries are underdeveloped (a result of decades of over-regulation). According to OECD labor statistics for 2009, the service sector represents only 69 per cent of total employment in Japan, compared to 77 percent for France, 79 percent for the United Kingdom, and 81 percent for the United States.

Transforming the economy from manufacturing to services is the most important part of Japan's growth strategy. But in order to achieve this transformation, interest rates need to be normalized. As long as interest rates remain near zero, unprofitable companies can survive and discourage new investment. Consumers also suffer because zero interest rates erode household interest income. According to national income statistics, interest payments represented 34 percent of national income in 1991. In 2009 they had tumbled to a mere 13 percent of income. In Japan's [yen]500 trillion economy, this 20 percent drop represents a [yen]100 trillion shift in income from households...

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