Rising producer costs have not yet filtered through to consumer prices, owing to entrenched expectations built up over decades of low or no inflation. Import price rises are notoriously difficult for domestic businesses to pass on to consumers. At a news conference in October, Bank of Japan Governor Haruhiko Kuroda blamed this hesitancy on habits developed during the country’s recurring periods of deflation. Companies have a compelling motivation to oppose hikes. Kikkoman, a soy sauce manufacturer, announced a 4-10 percent price rise starting February last week. In America, such an event might go unnoticed. However, it became national news in Japan.
Another important reason is Japan’s sluggish consumer recovery. The third quarter of the year saw a drop in private spending, which is now 3.5 percent lower than it was at the end of 2019. In Japan, spending on durable goods, which accounts for majority of the country’s inflation, has been virtually unchanged over the previous eight years.
The second paragraph is right; Japan’s low inflation is due to a lack of consumer spending. (While I prefer to concentrate on NGDP, the two aggregates tend to move in lockstep.)
Low inflation is unavoidable in Japan due to the lack of NGDP growth. The rumored “Firms’ “reluctance” to raise prices (stated in the first paragraph) has no bearing on Japan’s low inflation. It’s a mistake to mix together causes with symptoms. (On the other hand, in America, people complain about “price gouging” by oil firms, which is also false.)
It is theoretically feasible that enterprises’ hesitation to raise prices will result in decreased inflation, at least temporarily.
Assume the BOJ raises Japanese NGDP at a rate of 5% per year for the next few years.
If Japanese companies refused to raise prices, real GDP would rise at a rate of 5% each year.
However, at some point, you will run out of workers, and the rate of increase in real output will be unable to continue.
However, this is not the case in Japan, where NGDP growth has been minimal since the late 1990s.
The lack of Japanese inflation since 1996 can be explained entirely by slow NGDP growth (i.e. tight money).
There’s nothing left to explain from Japanese firm pricing behavior after accounting for near-zero NGDP growth.
PS. Take a look at the graph again.
It displays NGDP levels rather than growth rates.
This graph is one of the most perplexing in the history of modern macroeconomics.
By the way, Japan’s overall population in 2020 will be roughly the same as it was in 1996, implying that per capita NGDP will remain unchanged.
Imagine not getting a raise for the next quarter-century!
(In actual terms, Japan has done OK, but in comparison to countries like the United States, Australia, and Germany, its performance has been a bit disappointing.)
What accounts for Japan’s low interest rate?
The Bank of Japan (BOJ) set a 2% inflation target in April 2013 with the goal of ending deflation and establishing long-term economic growth. However, due to reduced global oil prices, it was unable to meet this goal and was compelled to adopt additional measures. As a result, the BOJ implemented a negative interest rate policy in February 2016 by dramatically boosting the money supply by acquiring long-term Japanese government bonds (JGB). The BOJ has previously mostly bought short-term government bonds, flattening the yield curve of JGBs. On the one hand, banks cut their holdings of government bonds since short-term bond yields had fallen below zero, and even long-term government bond interest rates of up to 15 years had fallen below zero. The vertical investmentsaving (IS) curve of the Japanese economy, on the other hand, did not result in an increase in bank loans to the corporate sector. First, we explain why, in this low-oil-price environment, the BOJ needs to lower its 2% inflation target. Second, we argue that Japan’s current monetary policy, particularly its negative interest rate policy, will not allow it to recover from its long-term recession and address its long-standing deflation problem. It is critical that the IS curve be slanted downward rather than vertical. That means that if borrowing rates are set too low, corporations must be willing to invest and the rate of return on investment must be positive. Japan’s long-term recession is caused by fundamental issues that its current monetary policy cannot address. The final section details our simulation results for dealing with Japan’s aging population by establishing a productivity-based wage rate and delaying retirement age, both of which will aid the Japanese economy’s recovery.
How does Japan keep inflation under control?
Another factor to examine in Japan is the influence of deflation on fiscal policy.
The Japanese government is one of the largest fixed-rate debtors in the world.
with 550 trillion yen in long-term obligations outstanding, more over 100%
% of GDP The Japanese government has issued long-term government bonds on a regular basis.
Having interest rates that are fixed (The Japanese government only started doing this in 2003.)
to issue inflation-indexed bonds that protect the principal against deflation.)
The Japanese government had to deal with unexpected deflation in the 1990s.
an increase in the actual debt burden that is, more taxes have been levied in real terms
to be collected rather than repaying a debt. Furthermore, because tax brackets differ,
When prices aren’t adjusted for inflation, deflation means the government has less money.
Due to the reversal of the well-known bracket creep phenomena, tax revenues will increase.
Chronology of policy responses
As the economic downturn worsened, the Bank of Japan shifted its stance on whether or not to raise interest rates.
as well as how to combat deflation. This section looks at the Bank of Japan’s operations.
efforts taken to combat deflation since 1998 (the start of the new millennium)
What causes Japan’s inflation?
COST PUSH and DEMAND PULL are the two fundamental causes of inflation. The former refers to an increase in production costs, which results in a price increase, whereas the latter refers to an increase in aggregate demand as a result of changes in consumption, investment, and government spending.
Is Japan a developing nation?
The ten years beginning in the early 1990s have been dubbed the “Lost Decade” in Japan. Following a boom in the previous years, the period was defined by economic stagnation and deflation.
“Although inequality hasn’t widened and income isn’t concentrated in the top tiers,” the economist added, “the number of low-income households has been expanding at the expense of middle-income groups in a secular income reduction across percentiles.”
According to the latest numbers from the Organization for Economic Cooperation and Development, Japan’s poverty rate is 15.7 percent. This indicator refers to those whose household income is less than half of the national median.
What is the matter with Japan?
Everyone is aware that Japan is in a state of emergency. The most pressing issues it faces – a deteriorating economy, an elderly people, a declining birthrate, radiation, and an unpopular and weak government pose an enormous challenge and maybe an existential threat. A tangle of minor worries and anxieties, of which Shukan Josei (March 13) enumerates 10, is less fateful but closer to home.
Some of these, such as one-third of single women living in poverty and an increase in the number of children in need of protection from child abuse, are far from insignificant. Others, such as the rise in bicycle accidents and habitat devastation, appear to be worthy of being put on the back burner at first glance, but on second thought…
Take, for example, fauna that is destructive. Deer, wild boar, monkeys, and other mindless critters do an estimated 20 billion yen in damage to crops, national parks, and people in the form of personal injury each year monkeys in particular. Shukan Josei claims that deer gnawing tree bark has transformed half of Japan’s national parkland into desolation, while pigs ravage rice paddies. If only the Japanese could develop a taste for game the way the Europeans have! The marauders would then be hunted in greater numbers by hunters, and a sustainable equilibrium would be restored. Despite the fact that the Japanese have become meat eaters, they still favor domestic livestock.
The problem with bicycles, which are convenient, environmentally beneficial, and provide wonderful exercise, is that anyone may ride one; no license is required, and there is no mandated teaching on road regulations, which many riders appear to be unaware of. Furthermore, because few people consider bicycles to be dangerous, they are not treated with the respect they deserve. Pedestrians are involved in many accidents Shukan Josei does not say how many and they can be fatal. Cyclists bear the brunt of the criticism, which isn’t really fair. According to the magazine, Japan is far behind other countries in developing exclusive bicycle lanes, particularly in Holland and Scandinavia.
The escalating child abuse numbers do have a silver lining. At least some of the increase can be ascribed to neighbors reporting issues, implying increased awareness and possibly increased neighborly care. Of course, this is of little consolation to the children who have been harmed. Much of the blame is placed on stress and solitude. Child-rearing used to be a community obligation, but communities are nearly dead; or it used to be the responsibility of the entire extended family, but extended families are nearly extinct as well. Furthermore, according to Shukan Josei, public children’s facilities are understaffed and shabby, whereas older people’ homes receive more attention.
Why is it that one-third of single women are poor? For one thing, the majority of working women (12 million) are part-time jobs with little pay and few benefits. Inheritance laws, for example, are slanted in favor of men. The impact on children is severe because many single women are also single mothers. “Japan provides very weak protection to its young population in comparison to other developed countries,” a lawyer tells the magazine.
Poverty among women is also a factor in the lowering birth rate. In Japan, 340,000 abortions are performed each year, the most of which are assumed on mothers who cannot afford to have children.
Why is Japan’s economy performing so well?
Japan has one of the world’s largest and most sophisticated economies. It boasts a highly educated and hardworking workforce, as well as a huge and affluent population, making it one of the world’s largest consumer marketplaces. From 1968 to 2010, Japan’s economy was the world’s second largest (after the United States), until China overtook it. Its GDP was expected to be USD 4.7 trillion in 2016, and its population of 126.9 million has a high quality of life, with a per capita GDP of slightly under USD 40,000 in 2015.
Japan was one of the first Asian countries to ascend the value chain from inexpensive textiles to advanced manufacturing and services, which now account for the bulk of Japan’s GDP and employment, thanks to its extraordinary economic recovery from the ashes of World War II. Agriculture and other primary industries account for under 1% of GDP.
Japan had one of the world’s strongest economic growth rates from the 1960s to the 1980s. This expansion was fueled by:
- Access to cutting-edge technologies and major research and development funding
- A vast domestic market of discriminating consumers has given Japanese companies a competitive advantage in terms of scale.
Manufacturing has been the most notable and well-known aspect of Japan’s economic development. Japan is now a global leader in the production of electrical and electronic goods, automobiles, ships, machine tools, optical and precision equipment, machinery, and chemicals. However, in recent years, Japan has given some manufacturing economic advantage to China, the Republic of Korea, and other manufacturing economies. To some extent, Japanese companies have offset this tendency by shifting manufacturing production to low-cost countries. Japan’s services industry, which includes financial services, now accounts for over 75% of the country’s GDP. The Tokyo Stock Exchange is one of the most important financial centers in the world.
With exports accounting for roughly 16% of GDP, international trade plays a key role in the Japanese economy. Vehicles, machinery, and manufactured items are among the most important exports. The United States (20.2%), China (17.5%), and the Republic of Korea (17.5%) were Japan’s top export destinations in 2015-16. (7 per cent). Export growth is sluggish, despite a cheaper yen as a result of stimulus measures.
Japan’s natural resources are limited, and its agriculture sector is strictly regulated. Mineral fuels, machinery, and food are among Japan’s most important imports. China (25.6%), the United States (10.9%), and Australia (10.9%) were the top three suppliers of these items in 2015. (5.6 per cent). Recent trade and foreign investment developments in Japan have shown a significantly stronger involvement with China, which in 2008 surpassed the United States as Japan’s largest trading partner.
Recent economic changes and trade liberalization, aiming at making the economy more open and flexible, will be critical in assisting Japan in dealing with its problems. Prime Minister Abe has pursued a reformist program, called ‘Abenomics,’ since his election victory in December 2012, adopting fiscal and monetary expansion as well as parts of structural reform that could liberalize the Japanese economy.
Japan’s population is rapidly aging, reducing the size of the workforce and tax revenues while increasing demands on health and social spending. Reforming the labor market to increase participation is one of the strategies being attempted to combat this trend. Prime Minister Shinzo Abe’s ‘Three Arrows’ economic revitalisation strategy of monetary easing, ‘flexible’ fiscal policy, and structural reform propelled Japan’s growth to new heights in 2013.
Do you want to know more? Download the Japan Country Starter Pack or look through our other Indonesia information categories.
Why is the Japanese economy stagnant?
Between 1991 and 2003, the Japanese economy grew at a pace of only 1.14 percent per year, while the average real growth rate between 2000 and 2010 was under 1%, both far below that of other developed nations. Debt levels continued to climb in reaction to the Great Recession in 2008, the Tsunami and Fukushima Nuclear Disaster in 2011, and the COVID-19 pandemic, which resulted in a new recession in 2020, further damaging the Japanese economy.
In terms of the overall Japanese economy, between 1995 and 2007, GDP declined from $5.33 trillion to $4.36 trillion in nominal terms, real wages fell by roughly 5%, while the country’s price level remained unchanged. While there is some disagreement about the magnitude and quantification of Japan’s setbacks, the economic impact of the Lost Decades is widely recognized, and Japanese officials continue to wrestle with its implications despite the fact that they have had minimal economic impact.
How much is inflation in Japan?
In 2021, Japan’s core consumer price index declined 0.2 percent, excluding fresh food. Except in 2014, when the index reflected the consequences of a consumption tax hike, the Bank of Japan’s 2 percent inflation target has not been met since 1992.
Is low inflation beneficial or harmful?
Inflation that is low, consistent, and predictable is good for the economyand your money. It aids in the preservation of money’s worth and makes it easier for everyone to plan how, where, and when they spend.
Companies, for example, are more likely to expand their operations if they know what their costs will be in the coming years. This allows the economy to grow at a steady rate, resulting in better salaries and additional jobs.
Why is Japan’s debt not a concern?
It is now evident from whom the Japanese government borrowed money, namely the Bank of Japan, which the government is not required to repay, and Japanese individuals. The fact that all Japanese bonds are denominated in yen is crucial.
Foreigners account for 6.4 percent of Japanese bond holders, but they purchased in yen. As a result, when the Japanese government repays its debt, it only needs to print yen. As a result, Japan does not need to be concerned about default.
Some countries, such as Greece, Russia, and Argentina, have experienced financial crises in the past. However, Greece’s bonds were denominated in euro, which Greece could not issue on its own, and Argentina’s and Russia’s bonds were denominated in dollars, which they could not, of course, issue on their own. A financial crisis can occur when a country has too much debt denominated in a currency that it cannot issue. However, it is not available in Japan.