The Bulletin

Japan has gone its own way on fighting inflation – can NZ learn from a global outlier?

  • Written by Michael Mouat, Researcher in Economic Geography, Massey University

Like most countries over the past three years, New Zealand has tried to manage inflation by increasing interest rates. Japan, on the other hand, has taken a different tack – with clear success.

In 2016, the Bank of Japan (BoJ) set the country’s interest rate at -0.1%[1] and left it there. During the same period, the Reserve Bank of New Zealand (RBNZ) has adjusted the interest rate 18 times[2], with 12 upward adjustments since the end of 2021.

Japan’s annual inflation rate peaked at 4.4%[3] in January 2023, while New Zealand’s peaked at 7.3%[4] in June 2022, before dropping to 6.0% in June this year.

What might explain these differences in interest rate policy and inflation outcomes? The answer begins with how Japan views inflation in the first place.

Inflation as a supply issue

Since the early 1980s, most central banks have believed inflation could be combated by increasing the base interest rate. This would cause domestic demand for goods and services to decrease, suppress wages and increase unemployment – eventually triggering a fall in general price levels.

New Zealand enshrined this approach in the Reserve Bank Act 1989, which introduced the RBNZ monetary framework[5]. Since 1999, the main policy tool for adjusting inflation has been the official cash rate (OCR), more or less mirroring the global central bank consensus.

Put bluntly, raising the OCR suppresses demand until unemployment is high enough for prices to fall.

Read more: UK interest rates: crashing the economy is no way to bring down inflation[6]

In contrast to New Zealand and elsewhere, the BoJ board[7] sees the recent inflation episode as primarily caused by “transient” supply issues. So, raising interest rates to suppress demand has no effect on supply chains disrupted by things such as a global pandemic, the war in Ukraine or cuts to oil production.

While not necessarily short lived, these disruptions are seen by Japan’s central bank as transient because they are unlikely to cause permanent structural changes. With it’s focus on supply issues, Japan has ultimately fared better.

Why interest rates could be inflationary

There are three reasons why Japan’s refusal to tinker with interest rates may have been more successful at fighting inflation than New Zealand’s orthodox policy of raising rates.

1. Interest income

Securities such as government bonds[8] attract interest. So, raising interest rates has meant new interest income began flowing from the public to private sector – in particular to those who have the money to invest in government bonds.

Treasury has calculated that interest income will more than double[9] in 2023 – meaning an extra NZ$3.4 billion will flow to private sector investors. At least some of those billions will be spent on goods and services, adding to New Zealand’s existing inflationary pressures[10].

Japan’s policy of holding the interest rate below 0% means issuing government securities does not provide significant new interest income, which would ultimately put upward pressure on prices.

2. Employment

Employment – and unemployment – are viewed differently in Japan, where the unemployment rate is 2.7% and hasn’t been above 3% since 2017[11].

The RBNZ[12], by comparison, forecasts rising interest rates will lead to rising unemployment, possibly tipping above 5% in the near future.

Read more: Interest rates: the case for cutting them permanently to zero[13]

Japan’s workers benefit from an “implicit contract[14]” between business and the rest of Japanese society, which delivers long-term employment. This implicit contract drives the BoJ policy of keeping interest rates low to fight inflation.

This policy broadly aligns with what’s known as “Okun’s Law[15]”. This links increasing unemployment with a reduction in productive output. New Zealand’s policy of increasing unemployment by raising interest rates therefore restricts production, putting upward pressure on prices by restricting supply.

Adding to this, increased welfare payments due to rising unemployment maintain demand for consumer goods at the same time as output is restricted. The New Zealand Treasury[16] forecasts welfare payments will increase by $10 billion over the next four years.

The BoJ policy of keeping the interest rate below zero supports productive output and suppresses the need for increased welfare payments. This likely keeps prices down, as reflected in Japan’s better inflation targeting performance.

The RBNZ policy of increasing rates, on the other hand, restricts output and increases welfare payments, likely adding to inflationary pressures.

3. Business expenses

Finally, raising interest rates might be inflationary when businesses require credit to operate. Compared to Japan, New Zealand businesses now have comparatively higher interest costs.

Increased interest costs translate into increased operational costs that can be passed through to consumers in the form of higher prices.

Increased interest costs in New Zealand are therefore more likely to be inflationary than Japan’s below-zero policy rate. This is reflected in recent inflation data from the two economies.

Reexamining inflation orthodoxy

The Bank of Japan’s divergence from monetary policy orthodoxy raises an important question: by raising interest rates to combat inflation over nearly four decades, have central banks been stamping on the inflation accelerator rather than the brakes?

Furthermore, did hundreds of thousands of New Zealanders need to lose their jobs at various times during this period?

By deliberately leaving the interest rate below zero, Japan has seen better inflation outcomes than New Zealand, where official policy has seen rates continually adjusted – the majority of which were increases.

There are other factors that may contribute[17] to Japan’s low inflation, such as government price controls and an ageing population. But as New Zealand tries to manage rising costs of living, it may be time to examine Japan’s approach and question orthodox wisdom about dealing with inflation.


  1. ^ set the country’s interest rate at -0.1% (
  2. ^ 18 times (
  3. ^ peaked at 4.4% (
  4. ^ peaked at 7.3% (
  5. ^ RBNZ monetary framework (
  6. ^ UK interest rates: crashing the economy is no way to bring down inflation (
  7. ^ the BoJ board (
  8. ^ government bonds (
  9. ^ interest income will more than double (
  10. ^ existing inflationary pressures (
  11. ^ above 3% since 2017 (
  12. ^ RBNZ (
  13. ^ Interest rates: the case for cutting them permanently to zero (
  14. ^ implicit contract (
  15. ^ Okun’s Law (
  16. ^ The New Zealand Treasury (
  17. ^ may contribute (

Authors: Michael Mouat, Researcher in Economic Geography, Massey University

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