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.
Will Japan’s interest rates ever be raised?
According to Trading Economics global macro models and analysts, Japan’s interest rate is predicted to be -0.10 percent by the end of this quarter. According to our econometric models, the Japan Interest Rate is expected to trend around 0.10 percent in 2023.
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.
What is the state of Japan’s economy?
Japan has been suffering from deflation and poor development since the 1990s, despite being the world’s fourth largest economy (as assessed by purchasing power parity). Low pricing, expensive imports, and a high debt-to-GDP ratio were not addressed by Shinzo Abe’s “Abenomics.”
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.
Is it true that deflation is worse than inflation?
Important Points to Remember When the price of products and services falls, this is referred to as deflation. Consumers anticipate reduced prices in the future as a result of deflation expectations. As a result, demand falls and growth decreases. Because interest rates can only be decreased to zero, deflation is worse than inflation.
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.
Is 0% inflation desirable?
Regardless of whether the Mack bill succeeds, the Fed will have to assess if it still intends to pursue lower inflation. We evaluated the costs of maintaining a zero inflation rate and found that, contrary to prior research, the costs of maintaining a zero inflation rate are likely to be considerable and permanent: a continued loss of 1 to 3% of GDP each year, with increased unemployment rates as a result. As a result, achieving zero inflation would impose significant actual costs on the American economy.
Firms are hesitant to slash salaries, which is why zero inflation imposes such high costs for the economy. Some businesses and industries perform better than others in both good and bad times. To account for these disparities in economic fortunes, wages must be adjusted. Relative salaries can easily adapt in times of mild inflation and productivity development. Unlucky businesses may be able to boost wages by less than the national average, while fortunate businesses may be able to raise wages by more than the national average. However, if productivity growth is low (as it has been in the United States since the early 1970s) and there is no inflation, firms that need to reduce their relative wages can only do so by reducing their employees’ money compensation. They maintain relative salaries too high and employment too low because they don’t want to do this. The effects on the economy as a whole are bigger than the employment consequences of the impacted firms due to spillovers.