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Japan’s deflated record on monetary policy

Author: Willem Sobeck (RIETI)

Since Shinzo Abe became prime minister in 2012, Japan has used monetary policy to fuel inflation. July 2022. The question is why the Bank of Japan (BOJ) has failed to meet its inflation target even though he has purchased 400 trillion yen (US$2.8 trillion) worth of government bonds over the past decade.

Japan has a long history of manufacturing. After the war, companies like Toyota, Panasonic, and Sony became world-class manufacturers. Competition in the global market has forced us to innovate to meet consumer demand. As they became more successful, profits and wages increased, and the Japanese economic miracle appeared.

After that, many shocks hit the Japanese economy. The global financial crisis was particularly devastating. In his first two years of the crisis, Japan’s industrial production fell 35%, real exports fell 40% and the Nikkei 225 index fell 80%. Japan’s real exchange rate rose 30%.that is important role Especially in the automobile and electronics industries, exports are declining, and Japanese companies are losing their price competitiveness.

To remain competitive, many Japanese exporters kept their export prices constant in foreign currency. The appreciation of the yen has led to a drop in yen-denominated export prices, while production costs in Japan have not fallen. Export prices fell an average of 30% below yen-denominated costs, and corporate profit margins fell sharply. A Japanese company replied: Production transfer to overseas We make luxury goods in Japan.

From February 2009 to 2013, deflation dominated the country, bottoming out at -2.6%. During his 2012 election campaign, Abe argued that the Bank of Japan should print unlimited yen to combat deflation. Bank of Japan Governor Haruhiko Kuroda implemented this expansionary monetary policy after Abe was elected. Between November 2012 and the end of August 2022, the yen has fallen by 55%. cause inflation Driven by consumer demand.

Yen used to be weak Increased price competitiveness Growth of Japanese companies and increase in exports.But after Japanese companies offshored production during the global financial crisis, the yen weakened. hardly done increase exports.it mutes the effects of depreciation Employment and Wages of Japanese Workers in Export Industries.

High-end products such as ceramic capacitors and image sensors currently being exported by Japanese companies require advanced technology and skilled workers. High-skilled workers, who are already well-paid, will benefit from a weaker yen that boosts exports. Ordinary manufacturing workers in the export industries that flourished during Japan’s post-war boom do not share in these gains.

Large companies like Toyota have found that a weaker yen increases the yen’s value of profits repatriated from overseas production and sales, driving up stock prices. Rising wages for highly skilled workers and higher stock prices will primarily benefit those at the higher end of the income distribution. Wealthier workers have a lower marginal propensity to consume than poor workers, so a weaker yen does little to boost aggregate consumption.

This is making life difficult for Mr. Kuroda, who has promised to maintain expansionary policies until wages and consumption drive inflation. The Bank of Japan keeps interest rates low, and the Federal Reserve, European Central Bank, Bank of England, and many other central banks are raising rates.

His job is becoming more difficult as Japanese companies are reluctant to raise prices in the Japanese market. Businesses have a strong sense of loyalty to their customers and are afraid they will lose business if they raise their prices. Firms often choose to absorb an increase in input prices rather than raise the price of final goods, even if it hurts their profit margins.

A continued depreciation of the yen could lead to a vicious cycle. A weaker yen against the US dollar would increase the cost of imported energy and US dollar-denominated commodities, increasing Japan’s trade deficit. Japan had a monthly trade deficit from August 2021 to July 2022. The yen could fall further as trade deficits lead to current account deficits. If depreciation becomes chaotic, Japanese policymakers should be ready to act. The Bank of Japan intervened by buying the yen on Sept. 22. However, intervening in the foreign exchange market without changing the interest rate differential between Japan and other developed countries is unlikely to result in a significant appreciation of the yen over time.

Prime Minister Abe has proposed three types of policies to revitalize Japan’s economy: monetary policy, fiscal expansion, and structural reforms. He poetically named these his three arrows.In practice, policy makers relied on About the arrows of monetary policy.while expanding Financial policy The depreciation of the yen has progressed, and the depreciation of the yen has not pushed up wages and consumption. After Japan moved much of its manufacturing overseas, the weaker yen no longer stimulates exports and does not affect the employment and wages of manufacturing workers it once did.

Low wages and sluggish consumption are serious problems for Japanese residents. It also prevents inflation from reaching the Bank of Japan’s target. But these problems cannot be solved by expansionary monetary policy alone.

Willem Thorbecke is a Senior Fellow at the Research Institute of Economy, Trade and Industry.

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