Inflation Isn’t the Problem in Japan. It’s the Reverse

japan inflation 2021

 TOKYO – In the United States, ev­eryone is talking about inflation. The country’s reopening from the coronavirus pandemic has un­leashed pent-up demand for ev­erything from raw materials like lumber to secondhand goods like used cars, pushing up prices at the fastest clip in over a decade.

Japan, however, is having the opposite problem. Consumers are paying less for many goods, from Uniqlo parkas to steaming hot bowls of ramen. While in the United States average prices have jumped 5.4 percent in the last year, the Japanese economy has faced deflationary pressure, with prices dipping 0.1 percent in May from the previous year.

 To some extent, the situation in Japan can be explained by its con­tinued struggles with the corona­virus, which have kept shoppers at home. But deeper forces are also at play. Before the pandemic, prices outside the volatile energy and food sectors had barely budged for years, as Japan never came close to meeting its longtime goal of 2 percent inflation.

It wasn’t for lack of trying. Over nearly a decade, Japanese policy­makers have wielded almost ev­ery trick in the economist’s play­book in an effort to coax prices higher. They have juiced the econ­omy with cheap money, spent huge sums on fiscal stimulus like public works and lowered interest

But as Japan has learned the hard way, low inflation can be an economic quagmire. And that ex­perience carries a warning for the United States if its current bout of inflation eases, as many econo­mists expect, and its economy falls back into the cycle of weak in­flation that preceded the pan­demic.

“Most economists, me included, are pretty confident that the Fed knows how to bring inflation down,” including by raising inter­est rates, said Joshua Hausman, an associate professor of public policy and economics at the Uni­versity of Michigan who has stud­ied Japan’s economy.

However, “it’s much less clear, partly because of Japan’s experi­ence, that we’re very good at bringing inflation up,” he added.

For consumers, falling prices sound like a good thing. But from the perspective of most econo­mists, they are a problem.

Inflation, they like to say, greases the economy’s gears. In small amounts, it increases corpo­rate profits and wages, stimulat­ing growth. It can also reduce the burden of debt, bringing down the relative costs of college loans and mortgages.

Japan’s inability to lift inflation is “one of the biggest unsolved challenges in the profession,” said Mark Gertler, a professor of eco­nomics at New York University who has studied the issue.

One popular explanation for the country’s trouble is that con­sumers’ expectations of low prices have become so en­trenched that it’s basically impos­sible for companies to raise prices. Economists also point to weakening demand Caused by Ja­pan’s aging population, as well as globalization, with cheap, plentifill labor effectively keeping costs low for consumers in developed countries.

The picture once looked very’ different. In the mid-1970s, .Japan had some of the highest inflation rates in the world, approaching 25 percent.

It wasn’t alone. Runaway prices set off by the 1970s oil crisis de­fined the era, including for a whole generation of economists who were groomed to believe that the most likely threat to financial sta­bility was rapid inflation and that interest rates were the best tool to combat it.

But by the early 1990s, Japan began experiencing a different is­sue. An economic bubble, fueled by a soaring stock market and rampant property speculation, burst. Prices began to fall.

Japan attacked the problem with innovative policies, including using negative interest rates to encourage spending and injecting money into the economy through large-scale asset purchases, a pol­icy known as quantitative easing.

It seemed to do little good. Still, economists at the time saw Ja­pan’s experience not as a warning to the world, but as an anomaly produced by bad policy choices and cultural quirks.

That began to change with the financial crisis of 2008, when infla­tion rates around the world plum­meted and other central banks adopted quantitative easing.

The problem has been most no­table in Europe, where inflation has averaged 1.2 percent since 2009, economic growth has been weak and some interest rates have been negative for years. During the same period, U.S. infla­tion averaged just below 2 per­cent. The Federal Reserve has kept its main interest rate close to zero since March 2020.

Some prominent economists viewed the low inflation as a sign that the U.S. and E.U. economies might be on the brink of so-called secular stagnation, a condition marked by low inflation, low inter­est rates and sluggish growth.

They have worried that those trends will deepen as both econo­mies begin to gray, potentially re­ducing demand and pushing up savings rates.

In 2013, under newly elected Prime Minister Shinzo Abe, Japan began its most ambitious effort to tackle its weak economic growth and low inflation.

The government embarked on a grand experiment of huge mone­tary and fiscal stimulus, buying enormous quantities of equities and lowering interest rates in hopes of encouraging borrowing and putting more money into the economy. As the supply of cash in­creased, the thinking went, its rel­ative value would decline, effec­tively driving up prices. Flush with money, consumers and com­panies alike would spend more. Voila, inflation.

To encourage spending, Japan adopted a policy, known as for­ward guidance, aimed at convinc­ing people that prices would go up as it pledged to do everything in its power to achieve its inflation target of 2 percent.

But the government’s efforts at persuasion fell short, so there was little urgency to spend, said Hi­roshi Nakaso, a former deputy governor of the Bank of Japan and head of the Daiwa Institute of Re­search.

Japan found itself in a vicious circle, said Takatoshi Ito, a profes­sor of international and public af­fairs at Columbia University, who served on Japan’s Council on Eco­nomic and Fiscal Policy.

Consumers came to expect “stable prices and zero inflation,” he said, adding that as a result, “companies are afraid of raising prices, because that would attract attention, and consumers may re­volt.”

The sluggish economy made companies reluctant to raise wages, he said, “and because real wages didn’t go up, probably con­sumption didn’t go up, so there was no increase for demand for products and services.”

As inflation hardly moved, some economists wondered if Ja­pan’s stimulus had been too con­servative, even as it racked up one of the world’s largest debt bur­dens.

Policymakers, citing a need to pay off the country’s debts and meet the growing costs of caring for an aging population, hedged against the spending by twice raising the country’s consumption tax, apparently weakening de­mand.

In the end, Mr. Abe’s experi­ment, known as Abenomics, may not have been as successful as hoped. But it has informed policy- makers’ response to the pan­demic, said Gene Park, a profes­sor of political science at Loyola Marymount University in Los An­geles who studies Japan’s monetary policy.

One takeaway, he said, is that governments could spend more than they had eve; thought possi­ble without setting off a rapid rise in inflation. Another is that they might have to spend considerably more than they had once consid­ered necessary to stimulate growth.

Japan “has given the U.S. more freedom to experiment with bold­er measures,” Mr. Park said.

During the pandemic, Japan, too, has tried to apply the lessons learned since 2013. The govern­ment has paid shops and restau­rants to stay closed, handed out cash to every person in the coun­try and financed zero-interest loans for struggling businesses.

Prices fell anyway. That was partly at the behest of the govern­ment itself, which recently pres­sured telecom companies to lower mobile phone fees it deemed too high. Most Japanese consumers are also still waiting to be vacci­nated against the coronavirus, holding back economic activity.

Even after the pandemic wanes, however, Japan’s inflation rates are likely to stay low, said Sayuri Shirai, an economics pro­fessor at Keio University in Tokyo and a former member of the Bank of Japan’s board.

After all, the primary problem remains unchanged: No one is re­ally sure why prices have stag­nated.

“The central bank probably doesn’t want to say that they can­not control inflation,” Ms. Shirai said. “Therefore, this issue has just been left without a clear dis­cussion.”

Be the first to comment

Leave a Reply

Your email address will not be published.