The country where inflation is good news

As a wave of inflation shakes the world’s economies and sends food, gasoline and rent prices soaring, there is one country that has been left out of these frightening numbers.

According to the Food and Agriculture Organization (FAO) Food Price Index, global food prices are at their highest point since 1990.

In this scenario, Japan recorded a 0.9% increase in consumer prices in February, compared to 7.9% in the US or 6.2% in the European Union.​

In Brazil, annualized March inflation was 11.3%; in Chile, 7.8% in February, Mexico, 7.2% and Colombia, 8.1%, (Argentina and Venezuela registered 52.3% and 340.4% respectively, but these are two exceptional cases).

But unlike the rest of the world, Japan wants its inflation to be higher, and for years it has been unsuccessfully implementing measures to try to achieve that. Its central bank’s goal is for inflation to stay around 2%, which is considered a healthy level.

How can an effect that undermines the purchasing power of citizens be so welcome?

“Basic economic models say that a modest level of inflation is what fuels an economy’s growth. Economists who think this way argue that Japan’s deflation is the reason for its slow growth”, explains professor Ulrike Schaede, from the GPS School. of Global Policy and Strategy at the University of California.

That is, without inflation, it is difficult for an economy to grow. It is only when these price changes are exaggerated — a rapid rise or a sharp fall — that imbalances begin.

Rising prices for energy, fertilizers and staple crops like wheat, due to Russia’s war with Ukraine, have left the country with its highest annual rise in 30 years. Despite this, the rise in prices is still lower than in the rest of the world.

lack of consumption

What makes Japan different is that, after decades of deflation, its citizens are extremely reluctant to consume at higher prices.

“If you think the prices of the things you need are going to fall as a result of deflation, you put off buying and wait,” Hiroyuki Ito, head of the Economics Department at Portland State University.

And if you think prices will be more expensive tomorrow than they are today, you’ll probably decide to buy as soon as possible.

Deflation then means that companies in Japan rarely try to raise prices and wages remain at similar levels for years.

“Consumers are encouraged to delay spending and companies miss opportunities to readjust prices to improve their margins. As a result, it is difficult to meet the potential growth rate,” says Junichi Inoue, director of Japanese equities at Janus Henderson.

A few months ago, the Kikkoman brand, producer of soy sauce, announced a 4-10% increase in its prices. News like this would have been slammed in the US, but in Japan they made headlines.

But is it good or bad for Japan to have a little inflation?

Experts agree that, in principle, it’s good, but it depends.

“Japan has been struggling with zero or negative inflation for years. But that doesn’t mean higher inflation is necessarily a good thing, it depends on what’s causing it,” says Ken Kuttner, an economics professor at Williams College in Massachusetts.

Inflation now is caused by external factors and is moderate and transitory in nature.

Japanese manufacturers face not only higher labor and logistics costs, but also very high raw material prices, among other factors.

And ideally, inflation should be lasting and come from internal factors such as higher wages or stronger consumption.

The hope, says Hiroyuki Ito, is that one inflation will lead to another. And that would be a paradigm shift for Japan.

“Current inflation is good news for Japan, but only partially,” says the economist. “We can say that when an economy is in the situation that Japan is in, that inflation can be good, but it’s not the best kind.”

“And the reason I say partially is because if inflation were driven by strong demand, that would be very healthy for the economy. But now it’s because of supply chain issues, the pandemic, and most importantly, the war on Ukraine, which has contributed to raising raw material price levels,” he adds.

Among the factors contributing to little or no inflation in Japan, economists cite an aging population as well as a lack of foreign labor.

“Japan’s slow economic growth is largely a reflection of a declining population growth rate and a labor force growth rate of just 0.1%,” said Takeshi Tashiro of the Peterson Institute.

As there are no children or immigrants, the expectation that there will be a population that pays pensions with their work is decreasing, and the population feels that they have to save or the moment will come when they will be unprotected.

“The Japanese are worried about the future and whether they will get enough pensions when they get older,” says Ito.

This makes them save a lot and consume little.

Given all these factors, it remains to be seen whether the small rise in prices the country is experiencing will be powerful enough to give an economy a boost that has remained largely unchanged for decades.