Tackling Japan’s Inflation Shock

Tokyo Report | Economy | east asian

Rising global energy prices are intensifying cost-of-living pressures and thwarting Japan’s post-COVID economic recovery.

After decades of mild but persistent deflation, Japan finally hit its 2 percent inflation target in April, largely due to a global surge in energy prices and an unprecedentedly weak yen against the dollar. Japan has enjoyed relatively stable prices since the mid-1990s, and rapidly rising world prices have caught Japanese consumers by surprise. Japan’s prolonged monetary easing and fiscal spending leaves limited resources to withstand cost-of-living pressures amid stagnant annual wages.

For decades, raising prices has been a taboo subject in Japan. While 2 percent inflation is relatively low by international standards, Japan has long been known as the land of falling prices. The lost decade after the bubble economy burst in 1991 marked the beginning of a state of “stagflation,” where consumer prices rise amid falling national income and a stagnant economy. That experience created a generation of price-conscious consumers where stable prices became the norm.

Then the global COVID-19 pandemic led the Japanese economy to contract 4.5 percent in 2020.

Today, many Japanese consumers are feeling the effects of unaccustomed price hikes without wage increases. ​​The consumer price index (CPI) for basic items jumped to a seven-year high, reaching 2.5% in May 2022. According to Teikoku Databank, the prices of more than 10,000 consumer goods increased by 13 %.

Japanese companies are hesitant to pass on price increases to consumers and tend to absorb price increases. However, foods such as bread, instant noodles, French fries, seafood, frozen foods, and fruits have become more expensive, as highlighted by Nikkei Shimbun. Many Japanese companies have opted for stealthy price increases, in which companies reduce quantity and volume rather than raising prices entirely. But the major Japanese restaurant chains Yoshinoya, Sukiya and Matsuya They have raised the price of meat bowls due to the increase in meat prices. Sixty-five percent of Japan’s beef consumption is covered by imports. Additionally, 75 percent of livestock feed is also imported, adding to inflationary cost pressures affecting domestic meat and poultry production.

Do you enjoy this article? Click here to subscribe and get full access. Only $5 a month.

Since people with lower incomes spend a greater proportion of their income on daily necessities, price increases will put significant pressure on low-income families, especially single mothers and families with school-age children. the government has introduced oil and gas subsidies to keep final prices under control and deliver cash to families. But food price increases are expected to continue through the summer due to continued global demand for wheat and packaging materials.

Meanwhile, the Bank of Japan has advocated keeping interest rates low amid rising prices and hopes to change the “deflationary mindset” of the Japanese people. BOJ Governor Kuroda Haruhiko was forced to publicly apologize after suggesting that “the Japanese public is getting used to inflation”.

The BOJ has been targeting a 2 percent inflation target for almost a decade. The goal was to stimulate the economy by getting people to consume and invest, which would lead to rising wages and a steady rise in the prices of food and consumer goods. But the current cost-driven inflation rate of about 2.4 percent is expected to last through the end of the calendar year, which is enough for people to dip into their savings, dampening consumer confidence. Households are poised to become more savings-oriented and are unlikely to loosen the strings on their portfolio in the current economic climate. This is a major headwind to the recovery of the pandemic-hit Japanese economy, which relies on higher consumer spending.

Economic headwinds also provide yet another reason for companies to hold off wage increases. Corporate Japan faces enormous pressure from the government to raise wages, but this requires higher corporate profits and higher productivity. Exporting companies that benefit from the weak yen are likely to see increased profits and are expected to pass them on as higher wages for employees. But under the current economic circumstances, it will be difficult for all workers to wait for wage increases.

Source link

Leave a Reply

Your email address will not be published.