Japan Has Raised Inflation but Can’t Shake Stagnation

Bank of Japan Governor Haruhiko Kuroda is leaving behind a mixed legacy as he steps down from his role after a decade. His ambitious initiative to tackle deflationary pressures that have plagued the nation’s economy since the collapse of the “bubble economy” in 1990 has shown some success. However, even Kuroda acknowledges that his efforts have not achieved the desired results.

Kuroda’s Bold Initiative

When Kuroda took the helm of the central bank in 2013, he declared that he would double the bank’s assets over the next two years to push more money into the economy. The goal was to create a 2 percent inflation rate, which the government believed was necessary to stimulate growth in an economy that had been stagnant for years.

Fast forward to 2023, and the country has achieved this goal, large thanks to external factors such as the COVID-19 pandemic, global supply chain disruptions, and the Russian invasion of Ukraine. However, economists predict that this spike in consumer prices may be short-lived as global commodity prices level off or decline.

The “Virtuous Cycle”

The question on everyone’s mind now is whether the increase in inflation will lead to what Kuroda calls a “virtuous cycle.” This is a cycle in which workers who face higher prices can demand higher wages after decades of stagnant wage growth. However, despite predictions of just under 4 percent wage growth this year, wages may still not keep up with inflation. Furthermore, smaller companies are not expected to participate in wage increases due to their low levels of profitability.

Even Kuroda himself has acknowledged that Japan is not in a situation where the current spike in inflation can be sustained in a way that benefits workers.

Implications of Negative Interest Rates

One of the main tools Kuroda used during his tenure to spread liquidity through the banking system was negative interest rates. However, while this policy spread liquidity, it also left the Bank of Japan with a bloated balance sheet. The BOJ now owns over half of all outstanding Japanese government bonds. This is more than five times the pre-Kuroda level and is equivalent to Japan’s annual GDP.

Despite the BOJ’s claims that it is “monetizing” the debt, the bank is keeping the government afloat by purchasing its bonds, a strategy that could have long-term implications for Japan’s economy.

Related Facts

• The Japanese government has grappled with an aging population and a low birth rate for years. This has strained the economy as a smaller workforce supports an increasingly elderly population.
• Japan’s debt-to-GDP ratio is one of the highest in the world, with public debt approaching 250 percent of GDP.

Key Takeaway

Despite Kuroda’s best efforts, the Japanese economy still faces significant challenges. While the spike in inflation may provide some relief, sustainable wage growth remains to be seen. Meanwhile, the negative interest rate policy has caused the BOJ’s balance sheet to balloon and has implications for the country’s future economic stability.

Conclusion

As Kuroda steps down from his role as the Bank of Japan governor, he leaves behind a complicated legacy. While he succeeded in raising inflation, his efforts to achieve sustainable wage growth and rid the economy of its deflationary pressures fell short. Additionally, his use of negative interest rates has caused the BOJ’s balance sheet to balloon, raising questions about the bank’s future strategy and the country’s economic stability.