Since the late 1990s, Japan has been in a state of deflation. Deflation is when the prices of goods and services go down. It is the opposite of inflation, which is when prices go up. Inflation is usually caused by an increase in the money supply. It increases the amount of money chasing after goods and services, driving up prices.
Deflation, on the other hand, is often caused by a decrease in the money supply or a decrease in demand for goods and services. Japan’s deflation has been caused by several factors.
One is the country’s demographics. Japan has a rapidly aging population, and as people age, they tend to spend less. This decrease in demand has helped to push prices down. Another factor is the country’s high savings rate. Japanese households save a larger percentage of their income than those in other developed countries.
It means there is less money to be spent, which can help to keep prices down. Finally, Japan’s export-oriented economy has also contributed to deflation. When other countries are in recession, they tend to buy fewer Japanese goods and services. It decreases the demand for Japanese goods and services and can cause lower prices.
The Japanese government has been trying to fight deflation for many years now. One way it has done this is by increasing the money supply. It has also tried to increase demand by implementing stimulus programs and cutting interest rates.
These efforts have not been very successful. Japan’s deflationary spiral continued, and the country’s economy was stuck in its pre-recession levels. The situation in Japan is a reminder that deflation can be a very difficult economic problem to solve.
A long time coming
The governor of the Bank of Japan is a very patient man. Nine years ago, when Haruhiko Kuroda took over as governor of the Bank of Japan (BOJ), he made a promise to get rid of the deflationary pressures that had been limiting growth ever since 1990, in the third-largest economy in the world. To achieve a 2 % inflation rate, which would increase wages and purchasing power, was his objective.
He finally appears to be on track to succeed, with commodity price inflation causing fears around the world. Although the most recent data is extremely unstable, economists forecast japan will eventually experience an inflation rate of 2%—probably higher—in the coming months.
The numbers are still low by international standards thus far. Japan’s consumer price index increased by barely 1% in March compared to the same month last year, while the US Consumer Price Index increased by 9%, the fastest growth since 1981. However, that also accounts for a 50% decrease in mobile phone rates following a government crackdown on the cartel of three companies that essentially controlled the market.
Other numbers were staggering even by Japan’s standards. The cost of energy grew by 20.8 percent, the highest increase since 1981, while the price of cooking oil rose by 34.7 percent. The Corporate Goods Price Index, a different indicator of wholesale inflation, increased 9.5 percent year over year in March, partly due to the awful circumstances in Ukraine.
After adjusting for the different one-time factors, analysts believe that overall inflation is currently roughly at the target of 2%. But nobody seems to be having a party. The Japanese yen is plunging dramatically in value as the government struggles to create subsidy packages for people who will be most impacted by the elections in June. However, Kuroda doesn’t seem concerned, seeing the greater expenditures as a temporary problem that won’t stop him from achieving his objective.
The consequence of twenty years of stagnation
The costs of Japan’s more than 20-year deflationary period are evident. The nation is still prosperous, secure, and comfortable, but many Japanese are unaware that while their country has mostly remained the same, the rest of the globe has been getting richer overall. According to OECD data, average yearly salaries have only increased by 3 percent over the previous 30 years, but they have increased by 47 percent in the United States. Prices have progressed along a similar path.
Tokyo was once the costliest city in the world, but today it is no longer in the top 10 of most worldwide rankings as a result of cost-cutting measures, a progressive lowering of tariffs, and increased import substitution.
In an extraordinary program that made it the buyer of nearly all new government debt, the central bank has been flooding the markets with cash for the past nine years to escape this trap. There is a lot of debt to be purchased because, on average, only 60% of government spending is covered by tax income.
It causes two significant issues. The Japanese government has a total debt of almost 190 percent of its yearly economic output, making it the most indebted nation in the world. According to data from the World Bank, this covert funding of government handouts has doubled the balance sheet of the BOJ, increasing its assets to 92% of annual GDP in 2020, compared to 22% in the US and 18% in Germany.
With all of this, Japan appears to be experiencing a different kind of inflation today. Kuroda’s objective was to establish a demand-driven positive cycle in which higher-paid employees spend more, driving up demand, stimulating new investment, and ultimately raising wages.
Instead, rising import costs will raise prices and lead customers to purchase fewer items, not more. In resource-starved Japan, where almost all raw resources and commodities are imported, the issue is particularly serious. That comprises more than 60% of the food consumed and over 95% of its energy, primarily from imported oil.
That has not been a major concern up until now due to the fairly calm global commodity markets over the previous ten years, but due to Russia’s invasion of Ukraine, both wheat and natural gas are at risk, and the issues are projected to get worse.
The government seeking a larger mandate in the June elections for Japan’s upper house of parliament is not blind to any of this. The amount of support in the second chamber is frequently used as a barometer of public mood about how things are going, even though the ruling Liberal Democratic Party is in no danger of losing control.
According to reports, the government is putting together a sizable $48 billion package of subsidies to aid consumers and small companies to lessen the impact of price increases. According to Nikkei, the help includes anything from further gasoline subsidies to low-interest loans and cash support.
Even though Japan’s core consumer prices are getting closer to the central bank’s 2% target, renowned businessman Ernie Higa says it’s still too early to celebrate. He said that inflation is kind of like cholesterol — there’s good cholesterol and a bad one, and what we’re dealing with right now in Japan is bad inflation. Higa is the chairman and CEO of Higa Industries and the man credited with introducing Domino’s Pizza to Japan.
Japanese neo-capitalism
In the meantime, Japanese Prime Minister Fumio Kishida is promoting his “new kind of capitalism” to spread the wealth created by large corporations and wealthy retirees over the previous ten years of Abenomics under former Prime Minister Shinzo Abe.
During a March parliamentary session, Kishida stated, “To deal with rising prices, we will employ every conceivable policy tool to defend people’s livelihoods by allowing companies to pass on costs and establishing conditions for them to raise wages for workers.”
Hiromichi Shirakawa, a former official of the BOJ and economist at Credit Suisse, is one skeptic who believes it is unrealistic to demand salary increases from businesses when other costs continue to rise. Every time costs rise; Japanese consumers have historically reduced their purchases. Retailers have historically been hesitant to try to raise prices as a result, giving rise to the idea of “shrinkflation,” wherein smaller amounts conceal higher unit costs.
A dramatic drop in the value of the Japanese yen has made things worse and will only make imports more expensive. The yen has dropped by 10% since the year’s beginning and is now close to 130 to the dollar. The economic gap that Kishida is trying to bridge will only widen as a result. Large corporations with significant foreign investments will experience dramatically higher profits when they send money home, but the common worker will wind up paying more at the register.
According to respected BOJ watcher Ryutaro Kono, chief Japan economist at BNP Paribas said that as people’s eyes turn to higher imported inflation and a weaker yen, it will be essential to reexamine and weigh the benefits and drawbacks of not only short-term stimulus spending but also the long-term negative impacts of locking in ultra-loose monetary policy.
Unpredictable far-east
There are signs everywhere. Umaibo, a puffed corn snack, is now 20% more expensive than when it was first sold for 10 yen ($0.08), a price it held for more than four decades. After 40 years, the top conveyer belt sushi chain in Japan, Sushiro, is raising the cost of its 110-yen plates to 120 yen. Schools now serve cheaper jelly instead of pricey fruit and veggies, and the price of onions has doubled in only one year.
This presents a conundrum for Japanese officials. The political risk of voter discontent among those who have not recently experienced inflation is so obvious that the Japanese government set aside $21 billion to help those who are feeling the strain from rising food and energy prices. A cycle of low-to-moderate inflation may also awaken the economy at the same time. Bloomberg quoted Sumitomo Mitsui Banking economist Hirofumi Suzuki as saying: “This is perhaps the finest opportunity for the economy to turn inflationary.”
PM Kishida is unlikely to abandon Abenomics in the near term, but he will be unwilling to continue along that free-spending, debt-exploding route in the medium-to-long run.
Kishida has so far committed to using fiscal spending to soften the impact of inflation, such as gasoline subsidies, which critics say are untenable for a nation burdened with significant public debt.
Analysts said persuading businesses to raise pay to assist families to cope with growing costs and increase productivity is a better strategy to allay public anxiety. These, however, are still longer-term goals that previous governments have also failed to achieve.
The question is whether these recent concerns will result in a prolonged and possibly irreversible decline given Japan’s aging population, declining workforce, and slow growth. Despite the unfavorable outlook, Japan has frequently confounded doubters in the past. Willem Buiter, who was Citigroup’s chief economist at the time, declared during a 2010 event that Japan is the most difficult economy in the world to comprehend. ‘If this were physics, gravity won’t operate in Japan,’ he said.