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Japan’s economy is reeling after emerging consumers pushed consumers to cut spending.
On the banks of the Akira Davis River
Report from Tokyo
While the rest of the world struggled to contain inflation, one country welcomed it with open arms.
In recent years, Japan has noticed an explosion of inflation, driven by pandemic supply chain issues and geopolitical shocks, as a way to pull the economy out of a decades-long cycle of low expansion and deflationary pressure. While the United States Federal Reserve raised interest rates to curb prices, the Bank of Japan kept rates low as inflation accelerated.
The theory that by sticking to ultra-low rates, the central bank can simply exploit the transitory rise in costs to herald the kind of inflation it has long sought: moderate, steady, and supportive economic growth.
Companies can simply use their pop-up prices to justify increases in value, which would generate higher revenues that would be used to increase workers’ wages. With more cash in their pockets, consumers can simply spend more, creating a positive economic cycle.
There have been some promising signs: Major Japanese corporations like Toyota have declared gigantic profits and promised the biggest wage increases in decades. In March, the Bank of Japan raised its policy interest rate for the first time in 17 years, concluding that the economy had reached the “virtuous circle” between wages and costs it had anticipated.
As the Bank of Japan’s assembly approaches this week, symptoms are developing that everything will go according to plan.
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