Japan Has Long Sought More Inflation and a Weak Yen. But Not Like This.

Tokyo — For years, Japan has sought what the central bank considered a magical formula: rising inflation and a weaker yen, in an attempt to boost chronically weak economic growth.

It didn’t work as intended. Despite solid interest rates and heavy fiscal stimulus, inflation did not meet the government’s modest goals. Workers’ wages were stagnant and growth remained sluggish.

Now Japan suddenly got what it wanted — it wasn’t exactly the way it wanted.

Overall inflation remains modest, but food and energy costs are rising rapidly, not as a result of increased demand, but as a result of market turmoil associated with the pandemic and Russia’s invasion of Ukraine. And the yen hit a 20-year low against the dollar. This has been a dizzying drop of more than 18% since September, which has made Japanese companies uneasy.

Twin powers pose yet another challenge to the world’s third-largest economy, as Japan lags behind other major nations in escaping the pandemic’s economic blow. Rising prices have surprised Japanese consumers who have been accustomed to stability for decades, and the depreciation of the yen is beginning to appear to not only stimulate overseas demand, but also depress domestic demand.

“The depreciation of the yen is attacking weaknesses in the economy,” said Takahide Kiuchi, an economist at Nomura Research Institute, who served on the Bank of Japan’s policy committee. “We are facing rising prices for all imports,” he said. “Even prior to actual inflation, this situation is undermining consumer sentiment.”

Concerns about a weaker yen reflect the gradual changes in the Japanese economy over the last decade.

In the previous era, when Japan was a superpower in the manufacturing industry, the depreciation of the yen would have caused the celebration, Japan’s exports would be cheaper overseas, the value of income earned abroad would increase, and foreign investment would have been attracted. ..

But now exports are less important to the Japanese economy as a whole, and companies trying to circumvent trade restrictions and take advantage of cheaper labor costs are starting to produce more products abroad and exchange rates are profitable. The impact is reduced.

The Bank of Japan reported in January that the depreciation of the yen continued to support the economy, but the positive impact on exports diminished in the decade leading up to the pandemic. However, its contribution to inflation increased over the same period.

Naohiko Baba, Chief Japan Economist at Goldman Sachs, said the pandemic and war in Ukraine likely amplified the negatives and reduced the positives. Prices are rising due to the shutdown of manufacturing in China, the roar of logistics chains, and the effects of the war on Ukrainian wheat and Russia’s gas and oil exports.

The depreciation of the yen has already pushed highs for resource-depleted Japan, which is highly dependent on imported fuel and food, and the cost of some necessities is rising at double-digit rates. Consumers are paying more for the Asahi for the first time in more than 10 years Beer..And one brand of convenience store chicken The price has been raised for the first time in over 35 years.

“From an exporter’s point of view, the depreciation of the yen should be beneficial, but for others it should be neutral or negative,” Baba said. He added that Japan’s decision to continue to ban foreign tourists who may be eager to take advantage of favorable exchange rates has further reduced the potential upside of currency devaluation.

There are several reasons for the weak yen. During the pandemic, the Japanese economy was sluggish and soaring commodity prices forced importers to sell more yen in dollars to pay bills.

However, experts say the main cause is Japan’s claim to keep interest rates near zero, despite other central banks led by the Federal Reserve raising interest rates significantly.

Spread widening is rushing to buy dollars as investors want better returns. And it seems likely that the escape will continue.

last week, Fed raises interest rates by 0.5 pointsIt says it intends to continue raising borrowing costs to cool the booming US job market and rapid inflation driven by rising wages, the biggest surge in more than 20 years.

In contrast, wages in Japan have risen very little and Japan’s high employment levels continue. It is relatively stable. This means that Japan’s inflation, which is below the government’s target of 2%, is likely caused by supply-side problems caused by war and pandemics, rather than increased demand due to low interest rates. ..

Theoretically, the Bank of Japan could stop the devaluation of the yen by raising interest rates. However, Governor Haruhiko Kuroda, whose term ends in April next year, sticks to his policies until he achieves both quality and quantity inflation that he envisioned nearly a decade before he was appointed Prime Minister Shinzo Abe. Seems to do.

We believe that moderate inflation caused by consumer demand will create a virtuous cycle of economic growth. Corporate profits grow, spurring investment, wage growth and domestic consumption.

In late April, Kuroda doubled his commitment to low interest rates and increased the Bank of Japan’s purchase of government bonds. Following the announcement, a yen sale was held.

Jean, a professor of political science and international affairs at Loyola Marymount University, who studies Japanese monetary policy, said that even if Kuroda wanted to raise rates, it could create a chain of economic impacts.・ Park said.

Park said Japan has become dependent on large spending to stimulate the economy, raising interest rates makes it more difficult to continue that approach, and Japanese government bonds that exceed 250% of annual economic output. He said it could be difficult. service.

Economist Disagree Policy makers are not keen to take that opportunity as to whether that level of debt is sustainable.

“High inflation is politically toxic, and the medicines that try to fix it are also very bitter medicines,” Park said. “If they raise interest rates, that too will be unpopular.”

Like Mr Kuroda, Prime Minister Fumio Kishida has wiped out the proposal that the Bank of Japan should aim for a stronger yen by raising interest rates.

Instead, he sought to fight rising prices with more stimulus. This year, Congress approved several subsidies to Japanese oil companies aimed at lowering gas prices. In April, MPs announced additional subsidies for families with children and direct cash payments of approximately $ 380.

Some politicians have suggested that the Bank of Japan can support the value of the yen through currency market intervention and sell its dollar holdings to raise the Japanese currency. But it’s an expensive proposal that is unlikely to be very effective, said Saori Katada, a professor of international affairs at the University of Southern California, who studies Japan’s trade and monetary policy.

“Recently, central banks have already given up on market intervention,” Katada said. “The whole market has grown so large that it won’t change with real intervention. It may change for a few days, but the trend will not change.”

With few practical options, one of the things Japan can do is “raise the yen,” and authorities are doing full coverage to convince the market to protect the value of the currency. But “it needs the help of other partners in the United States and Europe,” she said, and they are too busy dealing with their own economic problems to devote much thought to Japan. ..

“They don’t really care about the weak yen so far,” she said.

Sayuri Shirai said she is a professor of economics at Keio University and a former director of the Bank of Japan.

US interest rates “will never increase,” she said. “I don’t think you should be in a hurry.”

Hisako Ueno Report that contributed.