Why does Japan not have to worry about inflation?

Inflation in many G7 member countries is currently the highest in many years. But while inflation in the US and UK reached more than 8% and 9% respectively, the highest in many decades, in Japan, high inflation also stopped at 2.5%.

While the US Federal Reserve (Fed) and the Bank of England (BoE) have entered the global interest rate race, Japan has not changed its monetary policy and is still buying large amounts of money. bonds needed to support the economy, keeping the country’s 10-year government bond yields steady at 0%.

This antagonism stems from a fundamental divergence in Japan’s inflationary sentiment after three decades of stagnation. Although Japan faces many of the same difficulties as other countries, especially the high cost of imported goods, the link between rising prices and rising incomes does not seem to exist.

In contrast, according to Masamichi Adachi, Chief Economist at UBS Tokyo, the idea of ​​deflation will turn the situation in a different direction. “In Japan, an increase in the price of imported goods can lead to deflation. That’s why inflation isn’t a big deal here.”

In the US and Europe, businesses often respond to rising prices of raw materials and goods by passing on that extra cost to consumers. However, in Japan, businesses fear that consumers will boycott their products if they raise prices, while workers, after a long period of time, have not seen much change in income. , are very reluctant to ask for a raise, which helps them have more money to pay for the increased price of goods.

In addition, in case businesses have to pay more for imported goods but cannot increase retail prices, they will face losses. They often respond by cutting labor costs, and eventually deflation takes over, not inflation.

According to data released by the Japanese government on May 20, the consumer price index in Japan increased by 2.5% in April compared to the same period in 2021, while the core consumer price index, not including food costs, grew at the fastest rate in seven years, hitting the central bank’s (BoJ) target of 2.1%. But if you take out the cost of food and energy, inflation in Japan is only 0.8%.

For the BoJ and many experts, consumer demand in the Japanese economy is very weak. Therefore, the agency, with greater confidence than the central banks of Europe and North America, expects that inflation will be a temporary phenomenon and will quickly “cool down” once The situation of high prices of imported goods ended.

Several other factors also help explain why inflation is lower in Japan than in other advanced economies, and why experts say it won’t last.

First, April’s inflation does not include the reduction in telecommunications charges applied under former Prime Minister Yoshihide Suga in 2021. That means that the actual inflation is lower than the published figure.

Second, Japan’s economy has not yet fully recovered from before the pandemic, although the country has never applied strict epidemic prevention regulations like many other countries. Although there are few regulations restricting economic activity, the people of this country are still very cautious, even though most of the elderly in this country have been vaccinated against Covid-19. Japan is still closed to tourists. This has a strong impact on consumer spending.

Third, the “weak” yen used to be a factor supporting the Japanese economy, but that no longer has much effect at the moment. Major Japanese enterprises have moved most of their supply chains to China. The demand for capital goods that Japan exports is being strongly affected by the downward momentum of the Chinese economy.

“In addition to the increase in commodity prices, the impact from epidemic prevention regulations in China is very serious, many businesses are unlikely to increase their revenue this year,” said Kiichi Murashima, a Japanese economist. from Citi Group. “Businesses also see the yen’s decline as short-term and do not want to increase fixed costs (by increasing wages for workers).”

The BoJ is confident that inflation in Japan will soon fall and what they need to do is support the economy. “Inflation is caused by rising energy prices, so there is a lack of sustainability,” said BoJ Governor Haruhiko Kuroda. “Medium and long-term inflation expectations are not rising sharply,” he said.

“I would like to emphasize once again that the current situation of the Japanese economy is completely different from that of the US and Europe,” he said.

Important