How can Japan Have Both the Fastest Falling Currency and the Lowest Inflation in the World?
The Japanese Yen is at a 24-year low to the US dollar and prices have risen less than 2.5% How is this possible?
Inflation across the world has increased to rates not seen in multiple decades. Japan, where the headline consumer price index rose by only 2.5% stands as a stark exception.
This becomes even crazier in a world where the United States have an inflation rate of 8.5% and the EU has an average inflation rate of 8.6% this year!
Central banks all over the world are rapidly increasing interest rates and letting go of quantative easing (basically printing money) to quash inflation. Meanwhile, the Bank of Japan (BOJ) is still printing money like mad and refuses to increase its negative(!) interest rate!
Countries like Turkey are following a similar strategy to Japan, and it has an inflation rate of 80%!
How is Japan defying the laws of inflatin??
First off, while 2.5% inflation appears moderate relative to other parts of the world, it is very high for a country where a generation has not seen sustained price increases in over 30 years. Japan’s inflation has averaged only 0.3% in the past three decades.
However, Japan is definitely not immune to prevailing global inflationary forces such as higher oil prices and supply shortages. The difference in Japan’s experience stems from the way corporations and households react to these forces.
After decades of economic stagnation, Japanese consumers are extremly resistant to paying more, and Japanese businesses seldom try hiking prices. There is a story of a famous Izakaya chain that hiked their prices by 5%, and lost over 20% of its consumer base!
Another factor that helps companies keep their prices stagnant are that wages have barely grown in the past 25 years. This is in sharp contrast to economies like the US, where businesses usually pass on higher input costs to customers, who in turn seek wage increases. This explains why Japan’s core inflation remains low, staying in negative territory until recently.
Japan is an anomoly when it comes to labor markets too. A shrinking population has resulted in a tightening of its labor market. This usually increase wages. However, the Japanese labor market is much more rigid than other nations. Employees rarely switch jobs, and most of the country’s employers still provide long-term job security and set wages based on seniority rather than performance.
Inflation might be coming to Japan after all
Due to spikes in energy prices and commodities, Japanese people are in reality becoming much poorer. This has led to some speaking out and demanding higher wages. In fact, the Japanese government has gone out on record saying it is encoraging Japanese biggest unions to demand higher wages for its stakeholders.
On top of that, many companies have announced price hikes, in what has been dubbed the 'summer of price hikes' as costs of 3,600 food and drink items are set to rise.
Even though emerging inflationary forces have ended decades of deflation in Japan, the temporary shocks of COVID and the Ukraine war may not be enough to pull the nation out of its zero-inflation mindset. It will take more than a year of price increases to overcome three decades of stasis…