If you’ve ever been to Japan, you must have enjoyed a plate of Unagi. But Japan’s inflation has made such dishes increasingly expensive.
While the world desperately tries to curb inflation, Japan is doing the opposite. Its core inflation rates have hit a 41-year high of 4.2%, but instead of reducing inflationary pressures, the Bank of Japan (BOJ) has defied pressure to maintain its ultralow interest rate policies and continues to pump money into the economy.
Though this might seem counterintuitive, the BOJ has a reason for these measures. Japan has been experiencing low inflation for decades, with its increasingly ageing population and persistent saving mindset among consumers and firms. Consequently, aggregate demand is low.
To boost demand, interest rates have been below 0.5% since 1995, with rates going below 0% for the past six years. The BOJ hoped this would help lower the cost of borrowing and encourage consumer and investment expenditure in the economy, with consumers choosing to spend more on high-credit items and firms spending on previously unprofitable projects.
With the emergence of the Russia-Ukraine war, energy, and raw material prices surged, causing the cost of production of various firms to rise. Moreover, the Yen plunged in the currency market, and the depreciation of the Yen resulted in a further increase in raw material prices. This stimulated cost-push inflation in Japan, with consumers facing a decrease in real income as their wages did not outpace the rate of inflation. Pent-up demand from the COVID era also started emerging. With both cost-push and demand-pull inflationary pressures building up, why is the BOJ still maintaining its policy of low-interest rates?
The BOJ believes that an inflationary spiral needs to be set up for Japan to create sustainable inflation so that Japan does not experience slow economic growth in the future again. They believe the continuation of inflation through trade unions bargaining for higher wages exceeds productivity during upcoming meetings with trade unions in the summer. This ensures that employees can afford higher prices of goods and services. The increase in the cost of production for firms will create further inflation that will keep inflation sustainable in Japan.
However, the continued inflation is proving to be detrimental to consumers. With no wage increases yet, goods and services are becoming increasingly expensive. As Japan’s economy reaches full capacity, demand will continue to increase with no effect on GDP and prices will continue to rise.
As such, the BOJ is coming under increasing pressure to stay in touch with the people of Japan while they face a dilemma: whether to continue firing up inflation or maintain their citizens’ financial well-being.
On the other hand, the BOJ seems ready to control inflation. It has already modified its Yield Curve Control program, constituting a certain level of monetary tightening. As the BOJ goes through a leadership shift these coming months, changes are certain.
One thing is for sure: the BOJ must monitor its citizens’ well-being. It needs to be flexible in its policies to find a balance between maintaining citizens’ financial standing and creating a sustainable rate of inflation so that everyone can enjoy a delicious plate of Unagi for a reasonable price.
留言