‘Different from the United States’: Why Japan Shouldn’t Worry About Inflation

Inflation across the G7 has risen to its highest levels in several decades, but while in the US or UK that means worrying levels of 8 or 9 per cent, one country stands out as different: in Japan, high inflation means 2.5 per cent Just.

Moreover, as the US Federal Reserve and the Bank of England rush to raise interest rates, the Bank of Japan says it will Keep policy on holdBuy as many bonds as you need to keep 10-year yields fixed at zero percent.

The divergence illustrates a fundamental difference in Japan’s inflationary psychology after three decades of stagnant prices. Although Japan is highly vulnerable to some of the same shocks as other countries—particularly the rising cost of imported goods—there is almost no path from higher prices to higher wages.

Conversely, Masamichi Adachi, chief economist at UBS in Tokyo, said a deflationary mindset means the pressure is tilting in the other direction. In Japan, increases in import prices can lead to deflation. That is why it is difficult to imagine the possibility of continued inflation in Japan.”

In the United States and Europe, companies usually respond to higher prices for raw materials and goods by shifting those costs to consumers. But in Japan, companies fear a public backlash if they raise prices, while workers are being beaten up Decades of stagnant wages – Do not ask for higher wages that allow them to bear higher prices in the shops.

If companies have to pay more for imports but cannot increase their retail prices, they will suffer pressure on profits. They often interact by seeking to reduce wage costs, which ultimately creates deflationary rather than inflationary pressures.

According to government data released on Friday, Japan’s consumer price index rose 2.5 percent in April from a year earlier, while core consumer prices, which do not include volatile food prices, rose at the fastest pace in seven years, hitting the Bank of Japan’s target with growth. 2.1 percent. But after excluding the impact of food and energy, prices rose only 0.8 percent from the previous year.

The Bank of Japan, along with most economists, are convinced that the underlying demand in Japanese economy weak. Therefore, it expects with greater confidence than its counterparts in Europe and North America that the current wave of inflation will be transient and will fade once the impact of higher import prices has passed through the system.

Several other factors help explain why inflation in Japan is lower than in other advanced economies and why analysts believe it is unlikely to continue.

First, much of the April inflation figure reflected the disappearance from annual comparisons of the cuts in mobile phone tariffs designed by then-Prime Minister Yoshihide Suga last year. This means core inflation is lower than the numbers indicate.

Second, Japan’s economy has yet to recover to pre-pandemic levels, although the country has never imposed the strict lockdowns that have been implemented in other parts of the world. While there were fewer restrictions on economic activity, people continued to take precautionary measures, even after most elderly people were vaccinated against Covid-19. Japan remains closed to tourists. This has severely affected consumer spending.

Third, while the weakness in the yen has been providing a major stimulus to the economy, this effect is More silent than in the past. Big Japanese companies have moved much of their supply chain to China. The demand for capital goods that Japan’s exports are still severely affected by the weakness of the Chinese economy.

In addition to rising commodity prices, the effect of [Covid] Keiichi Murashima, a Japanese economist at Citigroup, said the shutdowns in China are dangerous, so manufacturers may find it difficult to expand revenue this year. “Companies also see the impact of a weaker yen as temporary windfall gains and are unwilling to increase fixed costs [by raising wages]. “

The Bank of Japan is confident that such inflation as Japan will calm down and needs to support the economy rather than constrain it. “The expected short-term price hike will be energy price-driven and lack sustainability,” Bank Governor Haruhiko Kuroda said in a recent speech. There was no sharp increase in inflation expectations in the medium to long term.

“I would like to reiterate that the current situation of the Japanese economy is very different from that of the United States and Europe,” he said.

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