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Japan’s low inflation conundrum | East Asia Forum

Author: Gunther Schnabl, University of Leipzig

Inflation has risen well beyond the targets of many central banks around the world, reaching 9.1% in the US and 8.6% in the Eurozone in June 2022. It will be 2.4% in June 2022.

Over the years, Japan’s inflation has lagged far behind other advanced economies, even though the Bank of Japan’s balance sheet is growing much faster than most other central bank balance sheets.

Inflation is generally caused by central banks printing excess banknotes, but that is not the case in Japan. Since the collapse of Japan’s bubble economy in December 1989, the money supply has grown much faster than the volume of goods and services, but consumer prices have not risen significantly. Japan’s low inflation conundrum three cause.

The Bank of Japan’s increasingly expansionary monetary policy is gradually lowering corporate funding costs. This allowed us to keep our prices low. Massive purchases of government bonds by the Bank of Japan allowed the Japanese government to heavily subsidize goods and services. Estimates suggest that about 50% of the goods and services in Japan’s consumer basket (used to measure consumer price inflation) are subsidized. Since 1990, Japanese government subsidies have been about 4 timesto reach ¥130 trillion (US$98 billion) in 2021.

The Bank of Japan’s expansionary policy has kept Japanese interest rates steadily below those in the United States. This has led to continued capital outflows to the United States and other countries. Individual households are investing part of their savings in US dollars, life insurance companies are buying US government bonds, and Japanese banks are lending to Southeast Asia. This outflow of purchasing power has reduced inflationary pressure on goods and services, as well as the Japanese asset market.

Government subsidies to businesses and continued capital outflows have kept domestic inflation low, but falling interest rates on bank deposits have increased incentives to maintain savings in cash or bank deposits. increase. Since most Japanese no longer distinguish between investment and savings, the money supply has been able to increase without subsequent inflation, especially since the financial crisis in Japan in 1998, when low inflation led to wage increases. We have curbed demand.

Governments in the US and Europe face increasing political pressure from inflation spikes and may consider copying Japan’s low inflation policy. But they should bear in mind that massive central bank-financed government spending has paralyzed the Japanese economy, driving inflation-adjusted wages down steadily since 1998. Abenomics, Japan’s standard of living continues to decline. This trend is shifting the huge burden of government debt to the younger generation.

Prime Minister Fumio Kishida’s “new capitalismIt is unlikely to change Japan’s declining standard of living. More investment in human capital, greater support for innovation and start-ups, and a deliberate commitment to decarbonization and digitalization could provide short-term growth stimulus for the Japanese economy. at the expense of rising government debt.

They also fail to address core issues. In other words, over 30 years of massive subsidies and excess funds have turned Japanese companies into zombies and hindered structural reforms. Kishida’s strong interest in inequality only encourages price controls through subsidies.

A decisive rate hike announcement in the US would put pressure on Kishida’s new capitalism. The US Federal Reserve is forced to raise interest rates to combat inflation. This response was required of the U.S. Federal Reserve Board because, unlike Japan, there are few subsidies to control prices, capital inflows are brisk, and wages are rising rapidly in response to price increases. rice field.

The Bank of Japan’s attempt to keep interest rates on Japanese government bonds low could help keep the government budget sustainable, as rising U.S. interest rates are likely to attract more capital inflows from Japan.But the Japanese yen depreciate further Rising prices of imported goods will accelerate the rise in consumer prices. Kishida’s new capitalism may not be as robust as Abenomics.

Kishida was able to stem the yen’s depreciation by introducing capital controls, but this would accelerate the decline of Japan’s welfare. We should start a comprehensive reform like the Meiji period.

Gunther Schnabl is Professor of Economic Policy and International Economics at the University of Leipzig.

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