Reasons for Low Price Increases in Japan

Reasons for Low Price Increases in Japan Japan

In August, the Consumer Price Index (CPI) for Japan increased by 2.8%. Japan’s inflation rate is the lowest among large nations, falling below those of the United States (8.3%) and the Eurozone (9.1%). Despite the fact that prices are rising more slowly than in other nations, Japanese households nonetheless face a significant burden because salaries are hard to raise.

We will explain why “low inflation” persists only in Japan.

Monetary easing:

The Bank of Japan has opted to continue its current monetary easing program in the face of rising global inflation. In comparison to other major economies, Japan has the lowest prices, with the Consumer Price Index (CPI) growing 2.8% in August. It is the highest level since 2008, excluding the phase impacted by the consumption tax rate hike, however, some people consider this to be relatively modest compared to the 8.3% in the U.S. and 9.1% in the Eurozone. The public in Japan has been in for a significant shock as a result of the infrastructure costs, such as power and gas rates, rising by more than 20% and food prices rising by about 10%.

The growing “interest rate gap” between Japan and the West has also contributed to the yen’s devaluation. The Bank of Japan continues to pursue large-scale monetary easing, in contrast to Western central banks that are rushing to tighten monetary policy in an effort to contain record inflation. This disparity in monetary policy stance is the primary cause of the global financial crisis. Since the BOJ has announced that it won’t raise interest rates any time soon, Japan is currently the only major central bank in the world with a negative policy rate.

Contrary to many other nations, Japan has consistently low inflation rates, which can be linked to the features of its economic policies. In other words, since 2013, it has substantially increased its monetary basis. This is because of Japan’s “Quantitative and Qualitative Monetary Easing” monetary policy, which Bank of Japan Governor Kuroda introduced as one of the economic measures to aid Japan’s economy out of the protracted deflationary recession and strong yen that had persisted since the burst of the bubble economy in 1993 until about 2013.

Although this strategy did not significantly boost the money supply, the average real GDP growth rate for the Japanese economy during the expansion that lasted until October 2018 was 0.9%. The government continued to pursue ultra-easy policies for large exporting corporations and the wealthy while holding down wages and boosting the consumption tax. According to economists and economic observers, this resulted in a recovery in Japan’s economy without a real gain in household income. This has exacerbated the slow expansion of personal consumption and the stagnation of the economy and is regarded to have contributed to the gradual increase in prices.

Second from the bottom in the G7:

The spread of the new coronavirus has resulted in huge government spending in Japan, but despite this, there haven’t been many direct advantages offered to households, which is also thought to be why prices haven’t increased significantly.

The risk of economic turmoil brought on by a spiraling wage-price relationship that increases inflation is also thought to be minimal in Japan because wages are not expected to increase. This is also the case in Europe and the US. On the other hand, even at the current low inflation rate, the burden on households is substantial given that a total of more than 20,000 food items are expected to see price increases by the end of this year and that earnings are not increasing.

Japan’s average annual income ranks 24th out of 35 countries, second from the bottom among the G7 nations, and hasn’t moved much over the past 30 years, according to data on worldwide average earnings published by the Organization for Economic Cooperation and Development.