Time Might Run Out on Japan’s Low-Rate Policy

But Tokyo’s three-decades-old effort to shore up its stagnant economy and fight deflation with hefty deficit spending has pushed government debt to the highest among major economies. Any sizable rise in interest rates would boost its debt-servicing costs, possibly triggering a vicious cycle of more borrowing at higher rates, accompanied by market turmoil, some economists say.

The widening differential between Japanese and foreign interest rates has supercharged the yen’s 20% fall this year to near its weakest since the late 1990s. That has swelled import bills and eroded Japanese wages relative to foreign wages, with surprising consequences.

Travel agencies are promoting a “Working Holiday” short-term employment visa program for Japanese youth in Australia, where the minimum hourly wage is twice Japan’s at the current exchange rate. Farms and factories are struggling to retain workers from Southeast Asia whose Japanese salaries were already modest before the yen’s fall reduced them even more. 

Japan was the only big market where

Apple Inc.’s

net sales shrank in the year through September, which analysts attribute in part to the yen’s weakness making iPhones more expensive.

“If the currency is down 30% and stays down, and if talented workers want to move abroad, at some point, the BOJ has to allow higher interest rates to keep Japan’s government running,” said

Adam Posen,

president of Peterson Institute for International Economics, a Washington think tank. “Japan doesn’t have to be growing hugely versus the rest of the world, but it has to have the sense that it’s not rapidly shrinking.”  

While the yen’s current weakness is in part a result of the interest-rate differential, says Hiromichi Shirakawa, chief Japan economist for Credit Suisse, it also reflects the “structural deterioration” of Japan’s economy, particularly the reduced competitiveness of Japanese manufacturers. 

Thus far the Bank of…