Japan’s experience offers important lessons for Malaysia

JAPAN'S recent yen volatility and rising public debt have not escaped the attention of Malaysians. As of mid-2026, the yen has traded around 161–162 against the US dollar while Japan’s national debt reached roughly 1,342 trillion yen at the end of 2025 — about 260% of GDP.

Decades of ultra-loose monetary policy and sustained heavy government borrowing have contributed to yen weakness, although these are not the sole drivers. The resulting currency depreciation raises import costs and intensifies concerns about Japan’s long-term economic sustainability.

Though Malaysia’s economy differs, Japan’s experience offers important lessons. Malaysia’s federal debt stood at about 63.1% of GDP in Q1 2026, down from 65.2% in 2025 but still close to the statutory ceiling of 65%.

Policymakers face the challenge of supporting growth while preserving fiscal flexibility. The danger is not the debt-to-GDP ratio but excessive reliance on borrowing rather than productivity-enhancing reforms.

Japan’s “Lost Three Decades” (period of economic stagnation triggered by the bursting of a massive real estate and stock market bubble in the early 1990s) were not the result of a single error but of a sequence of policy choices that made sense at the time but nevertheless produced unintended consequences.

The troubles partly trace back to the sharp appreciation of the yen after the 1985 Plaza Accord, an agreement among the G5 nations – United States, Japan, West Germany, France and the United Kingdom – to collaboratively devalue the US dollar.

Under US pressure, Japan allowed its currency to strengthen, reducing export competitiveness and straining its manufacturing sector. To offset the slowdown, the Bank of Japan adopted an expansionary policy, cutting interest rates to bolster borrowing and give firms time to restructure and invest.

Monetary easing, however, persisted for too long. Much of the abundant liquidity flowed into property and stock markets rather than productive investment, inflating asset prices and encouraging heavy borrowing against rising land and share values.

When the bubble burst in the early 1990s, banks carried massive non-performing loans while firms and households wrestled with debts accumulated during the boom. Falling asset prices weakened balance sheets, reduced investment and damaged confidence.

Banks then tightened lending while businesses postponed expansion, further curbing the economy. Eventually, workers’ pay stopped growing and consumers saved more, deepening stagnation and deflation.

Fiscal policy also compounded the problem. The Japanese government’s large-scale infrastructure spending repeatedly boosted demand but failed to generate sufficient long-term productivity gains, leaving public debt elevated without the growth capacity to service it sustainably.

Borrowing can be justified when it finances projects that raise future output, but it becomes burdensome when it fails to fuel the engine of economic growth and instead piles on national debts.

"Abenomics", introduced in 2013, combined aggressive monetary easing and fiscal stimulus. It was aimed at structural reform, but the first two “arrows” were deployed more forcefully than the third. While monetary and fiscal measures restored confidence and eased deflationary pressures in the short term, they could not resolve the deeper challenges: population ageing, labour-market rigidities, inadequate productivity growth and lack of innovation.

Returning to the root cause, Japan’s prolonged use of near‑zero interest rates is likely one of the key factors. Funds have flowed to the US, where interest rates are around 4%, as investors seek to profit from the interest‑rate differential.

This mechanism is known as the “yen carry trade”: international investors borrow cheaply in yen from Japanese banks and invest in higher‑yielding assets abroad. When borrowers convert large amounts of yen into US dollars, this exerts additional downward pressure on the yen.

Although a weaker yen can help exporters increase sales, Japan’s heavy reliance on imported energy, food and raw materials means that depreciation raises living costs and erodes household purchasing power.

A weak yen can further mask domestic economic weakness by boosting the yen‑denominated profits of Japanese companies that earn significant income abroad. This effect may prop up stock prices and generate a superficial market boom despite persistently weak local demand.

The Bank of Japan has been seen as hesitant to raise interest rates to defend a weak yen, as higher rates would sharply increase the government's interest burden, which is definitely not favourable to the government.

Higher interest rates would also burden domestic homeowners and companies with escalating finance costs.

In sum, Japan is facing the adverse, long-term consequences of major errors in its fiscal and financial policymaking. Cheap funds were not channelled to their intended uses, public funds were misallocated to unproductive sectors, and the government, acting on mistaken assumptions, retained certain economic policy tools for far too long. As a result, Japan is unlikely to exit the crisis in the near term.

That said, I do not mean Malaysia has mirrored Japan’s path; it indeed differs in demographics and industrial structure. Still, Japan’s history is a clear warning to many countries: growth excessively driven by cheap credit, asset inflation and repeated borrowing creates persistent vulnerabilities.

Malaysia should therefore carefully maintain financial and fiscal discipline, avoid overreliance on debt-driven stimulus and accelerate transformation towards higher-value industries, innovation and human capital development.

The lesson is clear for Malaysia: Act early and strategically before a quick fix hardens into a permanent crisis.

KOH YOK HWA

Kepong