High debt and rapid ageing increase Thailand’s Japanification risk

The Financial Times (FT), a British financial news outlet, published an analysis asking why Thailand has “one of the world’s lowest” interest rates.

The analysis followed a vote by the Monetary Policy Committee (MPC) this week to keep the policy rate at 1%.

It also warned that Thailand was becoming one of the countries in the region most exposed to “Japanification”, a prolonged period of low inflation and low growth.

Thailand at risk of ‘Japanification’

Thailand is not only becoming an aged society but is also “growing old before becoming rich”, while its heavy debt burden is holding back spending that should help stimulate the economy.

Once celebrated as an “Asian tiger”, the emerging-market economy now appears close to replacing Japan as “Asia’s new symbol” of economic stagnation and exceptionally low interest rates.

At 1%, Thailand’s policy rate is among the world’s lowest, with only Switzerland lower.

Although central banks worldwide are moving quickly to tighten monetary policy to contain inflation caused by the war in the Middle East, the Bank of Thailand (BOT) left the rate unchanged at its meeting on Wednesday, marking its third consecutive hold.

Many analysts expect that “Thailand may soon have a lower interest rate than Japan”.

Japan spent years contending with negative interest rates and deflation before raising its rate to 1% in June, and may raise it again as early as September to address rising prices.

Thailand’s low rate indicates that the country is becoming one of the region’s most exposed to “Japanification”, a prolonged period of low inflation and low growth.

High household debt, a rapidly ageing population and economic engines such as tourism operating below full capacity are constraining consumer spending.

Louise Loo, head of Asia economics at Oxford Economics, said, “Ageing leaves Asia overall more vulnerable to Japanification than other parts of the world. Thailand is bearing the heaviest impact because its debt is already extremely high.”

China faces similar risks but has a wider range of economic and fiscal tools with which to support its economy.

Major structural problems

Nond Prueksiri, senior economist at Siam Commercial Bank’s Economic Intelligence Centre (SCB EIC), described Thailand’s low interest rate as “more of a structural problem than a cyclical one”.

“There is no meaningful pull from demand. We are an ageing society and carry heavy debt, leaving consumers with little room to spend more.”

FT said Thailand had recorded 12 consecutive months of deflation before the Middle East conflict.

Although the outbreak of war drove prices higher, the pressure has already begun to ease, while headline inflation fell for a third consecutive month in July to 1.95%.

Deflationary pressure is not a positive sign for Thailand, Southeast Asia’s second-largest economy, which aims to become a “high-income country” by 2037.

The economy has been stuck at annual growth of about 2% for several years, and the World Bank and International Monetary Fund (IMF) expect growth to slow further in 2026.

The Covid-19 pandemic dealt a severe blow to tourism, one of the economy’s main pillars.

Exports, meanwhile, are under pressure from intense competition with cheaper Chinese goods and the emergence of new manufacturing bases in the region, including Vietnam.

The possibility of higher US import tariffs and a shrinking labour force are also affecting domestic production.

Don Nakornthab, assistant governor of the Bank of Thailand’s Monetary Policy Group, said on Wednesday that Thailand’s economic growth was “low and uneven”, adding that the policy rate could still be reduced if a crisis occurred.

However, the BOT executive also acknowledged that monetary policy was “almost at the limit” of what it could do to stimulate growth.

He said targeted financial measures from the central bank and fiscal stimulus from the government were needed to accelerate economic expansion.

Ageing adds to economic pressure

Demographic change is another element of Thailand’s Japanification risk.

The birth rate has fallen to a 75-year low, while World Bank data show that the total fertility rate is only 1.2 children per woman, below the 2.1 required to keep the population stable.

Experts expect Thailand’s population could fall from 67 million to just “30 million” over the next 50 years, while government officials and analysts warn that such a change would increase the risks to economic growth.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said, “Thailand’s working-age population has been clearly contracting since before Covid. This points to low structural growth in the future, which generally means low inflation and, in turn, low interest rates.”

Thailand’s economic and demographic problems resemble those of Japan and South Korea, but the difference is that “Thailand is becoming an aged society before it becomes a developed country”.

Thailand’s population aged over 65 doubled between 2000 and 2020, while the World Bank expects the proportion of over-65s to double again by 2040 to about 26% of the total population.

“We will grow old without becoming rich. We are taking the same path as developed economies despite not having reached the income level normally associated with such a transition,” independent economist Burin Adulwattana said.

Household debt highest in the world

Beyond its demographic problems, Thailand also carries a heavy debt burden.

HSBC said household debt stood at 86% of gross domestic product (GDP), “the highest among upper-middle-income countries worldwide”, while consumers have to rely on loans for everyday expenses amid slowing economic and wage growth.

Aris Dacanay, HSBC’s senior ASEAN economist, said, “Most household income has to be set aside for debt repayments, which limits consumption.”

The problem is also having a knock-on effect on businesses and investment.

Companies are slowing their expansion plans because they cannot rely on domestic demand or pass higher costs on to consumers.

Low interest rates losing their impact

Economists said the heavy debt burden had made low interest rates less effective at stimulating inflation and economic growth.

An economist at Oxford Economics said, “Monetary-policy transmission in Thailand is barely functioning. From now on, most of the support for the economy will have to come increasingly from the government in the form of fiscal measures.”

Measures of this kind are among the factors that have helped countries escape Japanification.

In Japan, for example, former prime minister Shinzo Abe pursued large-scale public spending and aggressive monetary easing to help the country break out of a prolonged cycle of low inflation.

However, economists said Thailand lacked sufficient fiscal space to take similar action.

They expect the government to begin gradually withdrawing some economic stimulus programmes from 2027 as the public-debt-to-GDP ratio approaches the government’s self-imposed ceiling of 70%.

“The fiscal deficit has to be reduced. That will slow the economy, and slower growth means monetary policy must offset the effect,” Dacanay said.

He expects the BOT to keep the policy rate at 1% until the end of 2027.

Pantheon’s Chanco said Thailand’s demographic problems, coupled with challenges to its export-led growth model, made it difficult for the economy to expand beyond its current low single-digit pace.

“The longer Thailand hesitates and delays reform, the more competitiveness it will lose to its regional rivals.”