If there’s one economic example of a dog that’s gotten stuck in the car and doesn’t know what to do now, it’s Japan, around 2024.
For 25 years, a succession of leaders has tried (and largely failed) to defeat deflation and produce sustained inflation. The same goes for Prime Minister Fumio Kishida, who announced on Wednesday that he would not seek another term as head of government. of the ruling Liberal Democratic Party of Japan.
Of course, inflation arose under Kishida’s leadership (he took office in October 2021). But it wasn’t Kishida who caused inflation to surpass Japan’s 2% target: it was Vladimir Putin.
Russia’s invasion of Ukraine has pushed up energy and food costs, in addition to how post-Covid supply chain chaos has pushed up costs. This led Japan to import raw fabrics at incredibly high prices through a currency that lost a third of its value in the last decade.
This is what economists call “bad” inflation. Since the late 1990s, Japan had struggled to generate demand-side inflation, driven by growing demand for wage increases. Rather, it resulted in a kind of “cost increase” that reduced households’ purchasing power and undermined business confidence.
All of this explains why a critical mass of Japan’s 125 million people hate the inflation that government leaders have told them they want.
Kishida’s decision to step down is arguably the most dramatic example of an inflationary reaction. Tokyo insiders say Kishida was beset by public anger over fundraising scandals within his party. In reality, it is an underperforming economy.
As many Americans feeling the economic boom in the world’s largest economy will tell you, inflation tends to overshadow everything else. Here in Japan, they are expanding faster than wages.
Kishida is paying for his party’s profligacy over the past 12 years, in which he has pledged to adopt ambitious reforms. Unfortunately, promises to modernize hard-working markets, cut red tape, boost innovation, and empower women have been relegated to the background to competitive financial easing.
In fact, let it be the last 25 years. Since the late 1990s, thirteen prime ministers have pledged to stabilize prices. Everyone has spent more time urging the Bank of Japan to take greater aim at the playing field, inspire innovation or increase productivity.
In 1999, the BoJ was the first primary central bank to cut rates to zero. Two years later, he pioneered quantitative easing. All that loose cash has diminished the urgency for lawmakers to overhaul the economy. Corporate CEOs had little incentive to restructure and take risks. .
This bullish and complacent market is now facing record high inventories.
To its credit: the LDP has managed to strengthen corporate governance over the last ten years. Measures to inspire corporations to generate returns on equity have boosted the Nikkei stock average above its 1989 highs.
However, wages for the average Japanese stagnated year after year during this period. This challenge of the two economies blocked Kishida’s approval numbers in the early to mid-1925s, ultimately giving him the position of prime minister.
Next month, Kishida’s LDP will have a successor. It will be up to that leader to find a way to revive the process of economic reform. This is much less difficult said than done given the political paralysis in Tokyo.
The same applies to the global context. China is slowing amid real estate and customer confidence crises that are hitting Asia’s largest economy. Europe advances on the ground, while the United States sounds the alarm.
The challenge for anyone updating Kishida is that many families here see inflation as a creeping tax increase. No serious economist would say that deflation exists. It’s a nightmare in many ways, for both bond and stock market investors.
But a little-known dynamic in Japan is the fact that many customers have come to embrace deflation. By reducing the cost of living, it compensated for the lack of wage increases. In a Japan with stagnant wages and high taxes, low customer costs amounted to tax relief.
The decline in inflation means Tokyo got what it wanted. He stuck the proverbial car. The question is: what now? Rising costs will only be appropriate for the Japanese masses if wages recover and family balance is repaired. Certainly, there is a dead end here. Japan wants higher wages, but too high wages will only exacerbate the dangers of inflation unless they are combined with productivity increases.
Japan’s productivity is among the lowest among members of the Organization for Economic Cooperation and Development. In 2022, as customers increased, productivity fell to its lowest point since 1970.
This is where the lack of primary economic reforms worries Tokyo again in 2024. Since October 2021, Kishida’s team has done little to nothing to reduce bureaucracy or increase employee efficiency. His successor will have to act to ensure that the next 1,046 days are more economically utilized than the last 1,046.
For now, Japan’s big reform rhetoric continues to revolve around bark and bite.