Japan’s Inflation Problem
Japan has been facing an unexpected problem: inflation. According to the latest report from the Statistics Bureau of Japan, consumer prices rose 3.4 percent in May, compared to the same time last year. This is down slightly from April’s 3.6 percent increase, but still higher than the 2.9 percent increase in May 2024.
A Shift from Deflation to Inflation
For decades, Japan’s economy has been characterized by deflation, with consumer prices often hovering around zero percent. However, since mid-2022, Japan’s CPI inflation has surged to multi-decade highs, reaching levels not seen since the early 1980s. This shift has been driven in part by the Bank of Japan’s (BOJ) negative-interest-rate policy, which was introduced in 2016 to stimulate the economy.
The Role of the Bank of Japan
The BOJ’s policy of holding interest rates at -0.1 percent for 97 months was intended to encourage borrowing and spending. However, it also led to a massive accumulation of government debt, with the BOJ now holding over 50 percent of Japan’s total government debt. This has helped keep debt yields low, but has also contributed to monetary inflation.
The Consequences of Monetary Inflation
The surge in consumer prices has been fueled by the BOJ’s aggressive purchases of government debt, which has required the creation of new money. This has led to a rapid increase in prices, with consumer prices rising from 0.1 percent in October 2021 to 3.8 percent in October 2022. While this may seem moderate in a global context, it is substantial in the context of Japanese prices.
Global Context
Japan’s CPI inflation rate is now tied with the UK’s at 3.4 percent, higher than the US rate of 2.4 percent and the euro area’s rate of 1.9 percent. While there are variations in how CPI is measured, all of these central banks use the same "two-percent inflation target," which Japan has exceeded.
The Impact on Wages
The rising price inflation has also had a negative impact on Japanese wages, which have been sluggish. According to Reuters, Japanese real wages fell for a fourth consecutive month in April, eroded by stubborn inflation that has continued to outpace pay hikes.
The Political Price of Price Inflation
The rising inflation has proven to be politically unpopular, forcing the BOJ to finally allow its target policy interest rate to rise above zero to 0.1 percent in April 2024. The BOJ has also begun to shrink its enormous portfolio of Japanese government bonds, reducing its holdings by 200 billion yen ($2.7 billion) per quarter.
The Limits of Easy-Money Policy
Japan’s experience illustrates the limits of easy-money policy, which has been used to fuel economic growth but has ultimately led to rising inflation and debt yields. As yields rise, debt service costs increase, leading to a sovereign debt crisis. Central banks are then forced to intervene again, fueling a cycle of monetary inflation and debt accumulation.
Conclusion
In conclusion, Japan’s inflation problem is a warning sign of the dangers of easy-money policy and the accumulation of debt. The only long-term solution is genuine fiscal austerity and debt repudiation. Until then, central banks will continue to struggle with the consequences of their own policies, caught in a cycle of monetary inflation and debt accumulation.
