Japan was the first economy to have a ‘zero interest rate policy’ (ZIRP) from 1996. ZIRP was considered an unconventional monetary policy with zero interest rates or very low interest rates. Japan implemented ZIRP in response to a financial banking crisis.
Japanese banks were in crisis. They had made loans that had gone ‘bad’. The debtors could not afford to repay the interest, so instead of defaulting on their debt, economic policy was changed to ZIRP. Debtors did not default on their interest rate payments on loans, as the payment had shifted to close to zero. This prevented some banks from bankruptcy. The side effect of a ZIRP meant that asset prices (houses) did not fall as much as they would in a normal financial crisis and then continued to grow in the years that followed.
What is the social effect of ZIRP on the Japanese population? The Japanese were the first nation to experience children living at home with their parents, unable to afford their own homes, and hence start their own families. Job security and economic security enjoyed by the previous generation was not as widely available. Living standards for this generation were significantly lower than the previous generation.
Japan has the oldest population in the world with 27% over the age of 65 years old. It has the lowest birth rate and replacement rate. The Japanese do not believe in immigration to balance out the demographics.
In 2009, (13 years later) Europe, the UK and the US followed Japan by adopting the now ‘conventional’ monetary policy of ZIRP. These countries now also experience children living at home with their parents for longer, unable to afford their own homes, with less job and economic security than the previous generation.
In 2016 the UK experienced its lowest birth rate for 10 years. The fear is that a return to a normal interest rate environment would damage the banking system and house prices. However, should the younger generation be paying the price?
Rebel Economics 
If home ownership is restricted to domestic residents, and furthermore that no-one has incentives to own more than one house (eg because of high income and capital taxes on buy-to-let landlords), then low real interest rates that raise real house prices (but which are necessary to sustain aggregate demand growth) should have no unwelcome distributional consequences of the type you describe. Some countries are waking up to the dangers of allowing extremely wealthy foreigners to monopolise the housing markets of their capital cities. This is just one of the many unwelcome side effects of uncontrolled globalisation. Inevitably, the negatives are all suffered by the least well off in society (the people you and I care about): increased competition for low-skilled jobs that depresses real wages, greater competition for affordable housing, etc etc. In high population density countries such as the UK, long-term zero real interest rates are a lesser problem for the housing market in my opinion than high population growth that inevitably arises from the combination of liberal immigration policies (including EU membership!) and rapidly increasing global population flows. ZIRP’s impact on the housing market can be managed, the latter can not.
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Thank you for your comments Tim. Long Term zero interest rates are a significant problem, because they result in asset price inflation. This asset bubble in the UK is very notable in the house prices. Interest rate policy is meant to target inflation, however house price inflation is not included in the inflation measurement by the Bank of England. Asset price bubbles results in a widening of the wealth gap between the richest in the country that own assets and the rest that do not. There is now a disconnect between interest rates and inflation and potentially a loss of a monetary tool if interest rates can not be increased. Prior to the Great Depression in 1929 the wealth gap was so wide that the top 10% of Americans owned 84% of the country’s wealth. Janet Yellen – US Fed Reserve Chairman – is talking now of wealth distribution in the US not seen since the Great Depression.
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As a monetary economist, I agree at least in part with much of what you say you Jenny. But you don’t address the consequences of higher real interest rates, in terms of increased unemployment, homelessness, etc that would arise from a deflated economy. Interest rates target steady inflation and sustainable GDP growth. Distributional questions must be addressed in other ways, including through the tax system. Access to affordable housing is a fiscal question, not one for monetary policy.
The house price bubble in the UK is caused by excess demand. That excess demand results from a largely free market wrt housing demand but restricted supply due to environmental policies etc, allowing wealthy speculators to acquire large housing portfolios at will (and allowing money laundering through the UK housing market from overseas). Low real interest rates is just one of many factors causing a bubble. Indeed, ZIRP is neither a necessary nor sufficient condition for a bubble, as history has demonstrated. Other factors are always at play. As you know, the UK is hardly alone in pursuing ZIRP. And yet as far as I know there has been no post-2008 house-price bubble in any of the US, Spain, Germany, Greece or Italy. If one hypothesises a housing market of the type I describe, prices of affordable homes will increase only to the extent that less well-off purchasers can still afford those higher prices (arising from lower real mortgage rates), as simply there are no other prospective purchasers of those houses.
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Thanks for your comments Tim. Again very interesting and thought provoking. At the moment we have a wealth distribution in the UK and the US and probably other countries that is similar to the wealth distribution pre the Great Depression in 1929. The wealth is very concentrated in the hands of the few. The wealth has not been driven by income growth but by asset growth. Redistribution through fiscal policy that addresses income redistribution is therefore unlikely to resolve the issue. Low interest rates in the UK have undoubtedly fuelled the housing bubble, but there are other factors such as overseas investors seeing the UK as a safe haven for investment. In reference to your initial comment that higher real interest rates will increase unemployment and therefore homelessness, we are currently at very low unemployment levels and interest rates are meant to be targeting inflation and not employment.
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I agree Jenny that ZIRP and QE have redistributed wealth unfairly, including through the housing market. But I (and the MPC) would disagree that higher interest rates are the best solution. In closing, I’ll add one new idea! The removal of trade barriers etc (“globalisation”) since the Great Depression has had a major effect in promoting the growth of mega-corporations such as Apple (currently valued at nearly $1 trn). It is globalisation (including greater labour mobility internationally) that has at least in part increased the returns to capital and depressed those to labour. Globalisation has undoubtedly resulted in reduced poverty in emerging economies such as India and China. But in the developed economies of the US and UK, it at least partly explains the concentration of wealth in the hands of multi-billionaires, the beneficiaries of globalisation, who regard global housing portfolios in elite cities such as London as a means of conspicuous consumption and advertising their importance and success. Prospective London house-buyers have been the losers. (I think you made this point yourself in your NZ piece.)
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