Inflation in the G7 has climbed to multi-decade highs, but in the U.S. or the U.K. that means a staggering 8 or 9 percent, one country is different: in Japan, high inflation simply means that 2.5%.
In addition, while the Federal Reserve and Bank of England rush to raise interest rates, the Bank of Japan said it will keep policy on holdbuy as many bonds as possible to keep the 10-year yield fixed at 0%.
This divergence illustrates a fundamental change in Japan’s inflationary psychology after 30 years of price stagnation. While Japan has been hit as badly as other countries by some of the same shocks — notably the rising cost of imported goods — there has been little pass-through from rising prices to rising wages.
In contrast, Masamichi Adachi, chief economist at UBS in Tokyo, said a deflationary mentality meant the pressures were trending in the opposite direction. “In Japan, rising import prices could lead to deflation. That’s why it’s hard to imagine inflation in Japan being sustainable. “
In the U.S. and Europe, companies typically respond to rising raw material and commodity prices by passing these costs on to consumers.In Japan, however, businesses feared a public backlash if they raised prices, while workers were Decades of stagnant wages – Don’t ask for higher wages, make them affordable in stores.
If companies have to pay more for imports but fail to raise retail prices, they will suffer a profit squeeze. Their response is usually to seek to cut wage costs, ultimately creating deflationary rather than inflationary pressures.
Japan’s consumer price index rose 2.5 percent in April from a year earlier, according to government data released on Friday, while the core consumer price index, which strips out volatile food prices, rose at the fastest pace in seven years, reaching the Bank of Japan’s Growth target of 2.1%. But excluding the impact of food and energy, prices rose just 0.8% from a year earlier.
The Bank of Japan, like most economists, is a firm believer in Japan’s underlying demand Japanese economy weak. As a result, it is more confident than its European and North American counterparts that current inflation will be temporary and will subside once the impact of higher import prices passes through the system.
Several other factors help explain why Japan’s inflation rate is lower than in other advanced economies, and why analysts believe it is unlikely to continue.
First, a large portion of April’s inflation figures reflected the disappearance of last year’s yearly comparisons of tariff cuts on mobile phones designed by then-Prime Minister Yoshihide Suga. That means underlying inflation is lower than the numbers suggest.
Second, Japan’s economy has yet to return to pre-pandemic levels, even though the country has never imposed strict lockdown measures in other parts of the world. Despite fewer restrictions on economic activity, people continued to take precautions even after most seniors were vaccinated against Covid-19. Japan remains closed to tourists. This has hit consumer spending hard.
Third, while a weak yen used to provide a great stimulus to the economy, the effect was quieter than ever. Large Japanese companies have shifted most of their supply chains to China. Demand for capital goods, which Japan still exports, has been hit hard by a weakening Chinese economy.
“In addition to rising commodity prices, [Covid] Citigroup Japan economist Kiichi Murashima said China’s lockdown is severe, so manufacturers may struggle to expand revenue this year. “Companies also see the impact of yen depreciation as a temporary windfall and do not want to increase fixed costs [by raising wages]. “
The Bank of Japan believes that inflation like Japan’s will subside and it needs to support the economy rather than suppress it. “In the short term, price increases are expected to be driven by energy prices and lack sustainability,” the bank’s president, Haruhiko Kuroda, said in a recent speech. “Inflation expectations in the medium to long term have not risen significantly.
“I want to stress again that the current state of the Japanese economy is completely different from the U.S. and Europe,” he said.
