Uncommon Insights into Japan’s Central Bank: Why You Need to Know Them
Why Japan’s Inflation Won’t Be Rising Anytime Soon
As Japan struggles to accelerate its economy, experts have speculated whether inflation could cause concern shortly. However, given the current state of the Japanese labor market and the government’s policies, it is unlikely that the country will see a significant increase in inflation anytime soon. Here’s why:
The Core CPI Is Only Around 2% YoY
Japan’s Western-style core CPI, which excludes all food items, is only around 2% YoY now. While no consensus forecasts are available for this figure, it is expected to be significantly lower later this year. This relieves the new leadership at the Bank of Japan (BoJ) and the government, as inflation remains below Japan’s target.
Japan Is the Least Inflationary Country in the World
Japan is known for its stable labor market and low inflation rates. Workers hardly ever strike and rarely change jobs for higher salaries, making wage hikes an unlikely component of inflation. However, Governor Haruhiko Kuroda and members of BoJ will want to see more than just one round of substantial wage hikes before believing in a sustainable, virtuous cycle of disinflationary growth.
Inflation Bonuses Over Major Wage Hikes
Many large companies prefer to give special inflation bonuses rather than permanent, major wage hikes. Meanwhile, many SMEs cannot pay much more to labor this year, though minimum wage rates are rising. The continued preference for inflation bonuses instead of wage hikes means that inflation remains less concerned.
Consumers Are Far From Optimistic
Japanese consumers remain far from optimistic, given the current state of the economy. The high inflation rates have curtailed spending, with a sustained period of lower inflation required to promote increased spending habits. Until consumers become comfortable with spending more fully, inflation remains unlikely to skyrocket.
A recession would be dangerous at this time.
Experts have suggested that tightening policies just before recessions has been the bane of several BoJ governors. Kuroda would have been right in rejecting a broadening the yield curve control (YCC) band, given that China’s economy was weakening under the zero-Covid policy and that the G7 looked likely to enter recession, not to mention war uncertainties. Moreover, a recession at this point would have negative global implications. Japan may be forced to sell large amounts of US treasuries and other bonds to bolster its domestic markets even after last year’s major sales.
Related Facts
- Japan’s GDP has been sluggish for decades, and due to demographics, it is unlikely that it will greatly excel past a quarter or two of acceleration fueled by increased tourism.
- Tightening policies just before recessions has been detrimental to several BoJ governors.
- If the official policy rate rises, the damage to many households and the government deficit will be large.
Key Takeaway
Despite concerns, Japan’s inflation rate is unlikely to rise anytime soon because of its sluggish economy, stable labor market, and government policies. Without significant wage hikes or a sustained period of lower inflation, consumers remain far from comfortable spending fully, making inflation less of a concern. A recession at this point would have negative global implications, and, at best, Japan hopes to continue its slow, steady growth toward economic stability and sustainable progress.
Conclusion
Despite the ups and downs of the years, Japan remains a stable, reliable country with a well-managed economy. Although inflation remains an everyday concern for many policymakers, it is unlikely to represent a significant economic risk anytime soon due to Japan’s current state and policies. Furthermore, after increased tourism helped boost the economy, it is hoped that Japan will continue to make steady progress toward sustained growth.
