Inflation? Not in Japan. And This Could Hold A Warning To The USA


TOKYO – Everyone in the United States is talking about inflation. The country’s reopening from the coronavirus pandemic has boosted prices, unleashing pent-up demand for everything from raw materials like lumber to second-hand goods like used cars. Fastest clip in over ten years.

Japan has the opposite problem. Consumers pay less for many items, from Uniqlo parkas to steaming hot bowls of ramen. Average prices in the US rose 5.4 percent last year, while the Japanese economy faced deflationary pressure and prices fell 0.1 percent in May from the previous year.

To some extent, the situation in Japan can be explained by their ongoing struggle with the coronavirus that keeps shoppers at home. But deeper forces are also at work. Before the pandemic, prices outside the volatile energy and food sectors had barely fluctuated for years, as Japan never came close to its long-awaited 2 percent inflation target.

It wasn’t for trying. For nearly a decade, Japanese policymakers have used almost every trick in the economist’s playbook to push prices higher. They fed the economy with cheap money, spent huge sums on fiscal stimulus like public works, and lowered interest rates to levels that made borrowing almost free.

But low inflation can be an economic swamp, as Japan has learned the hard way. And this experience carries a warning for the United States, as many economists expect, if the current period of inflation eases and its economy returns to the weak inflation cycle before the pandemic.

“Most economists, myself included, are pretty confident the Fed knows how to lower inflation, including raising interest rates,” said Joshua Hausman, associate professor of public policy and economics at the University of Michigan, who studies the Japanese economy.

However, he added, “it is much less clear that we are very good at raising inflation, in part because of Japan’s experience.”

Falling prices seem like a good thing for consumers. But from the point of view of most economists, they are a problem.

They like to say that inflation greases the wheels of the economy. In small amounts, the company encourages growth by increasing its profits and wages. It can also reduce the debt burden and lower the relative costs of college loans and mortgages.

Mark Gertler, professor of economics at New York University who studies the issue, said Japan’s inability to handle inflation is “one of the biggest unresolved challenges in the profession.”

A popular explanation for the country’s problem is that consumers’ expectations of low prices are so entrenched that it is fundamentally impossible for companies to raise prices. Economists also point to weakening demand caused by Japan’s aging population, as well as globalization with cheap, abundant labor that effectively keeps costs low for consumers in developed countries.

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

He was not alone. The runaway prices caused by the oil crisis of the 1970s defined the era, including an entire generation of economists who were prepared to believe that rapid inflation was the most likely threat to financial stability and that interest rates were the best tool to combat it.

But in the early 1990s, Japan began to have a different problem. An economic bubble has burst, fueled by a rising stock market and widespread real estate speculation. Prices started to drop.

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

It didn’t seem to do much. 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 oddities.

This began to change with the 2008 financial crisis, when inflation rates worldwide fell and other central banks adopted quantitative easing.

The problem is most striking 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, the US inflation average was just under 2 percent. The Federal Reserve has kept the main interest rate close to zero since March 2020.

Some leading economists have seen low inflation as a sign that the US and EU economies may be on the verge of so-called secular recession, a condition marked by low inflation, low interest rates and slow growth.

They worry these trends will deepen as both economies begin to gray, potentially reducing demand and increasing savings rates.

In 2013, under newly elected Prime Minister Shinzo Abe, Japan embarked on its most ambitious efforts to combat its weak economic growth and low inflation.

The government embarked on a massive monetary and fiscal stimulus experiment by buying huge amounts of stocks and lowering interest rates in the hopes of encouraging borrowing and investing more money in the economy. As the cash supply increased, the thought was gone, its relative value would fall, effectively raising prices. If you’re overflowing with money, consumers and companies alike will spend more. Here, inflation.

Japan adopted a policy to encourage spending. Forward guidanceIt aimed to convince people that prices would rise, promising to do everything in its power to meet the 2 percent inflation target.

But Hiroshi Nakaso, former vice-president of the Bank of Japan and head of the Daiwa Research Institute, said the government’s efforts to persuade had been insufficient, so there was little urgency to spend.

Takatoshi Ito, professor of international and public relations at Columbia University, who serves on Japan’s Council for Economic and Fiscal Policy, said that Japan finds itself in a vicious circle.

He added that consumers are expecting “stable prices and zero inflation”, as a result of which companies are afraid to raise prices because this will draw attention and consumers may revolt.

The stagnant economy has made companies reluctant to raise wages, and “probably because real wages haven’t increased consumption has not. Therefore, there was no increase in demand for products and services.”

As inflation has barely moved, some economists have wondered if Japan’s stimulus was too conservative, despite it raising one of the world’s largest debt burdens.

Citing the country’s need to pay off its debts and meet the rising costs of caring for an aging population, policymakers have countered spending by raising the country’s excise tax twice and apparently weakening demand.

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

One takeaway, he said, is that governments can spend more than they think is possible without causing a rapid rise in inflation. Another is that they may have to spend much more than they once thought necessary to stimulate growth.

“Japan has given the United States more freedom to try bolder measures,” said Mr Park.

During the pandemic, Japan also tried to apply the lessons learned since 2013.

The government paid shops and restaurants to stay closed, distributed cash to everyone in the country, and financed zero-interest loans for businesses in distress.

Prices have dropped again. This was in part at the behest of the government itself, which had recently pressured telecom companies to lower their cell phone charges, which it deemed too high. Most Japanese consumers are also still waiting to be vaccinated against the coronavirus, stopping economic activity.

Sayuri Shirai, professor of economics at Keio University in Tokyo and a former board member of the Bank of Japan, said Japan’s inflation rates will remain low even after the pandemic subsides.

After all, the primary problem hasn’t changed: No one is sure why prices have stagnated.

“The central bank probably doesn’t want to say they can’t control inflation,” Ms. Shirai said. “Therefore, this topic was left without clear discussion.”


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