Stimulus Check – Inflation? Not in Japan. And That Could Hold a Warning for the U.S.
TOKYO — In the United States, everyone is talking about inflation. The country’s reopening from the coronavirus pandemic has unleashed pent-up demand for everything from raw materials like lumber to secondhand goods like used cars, pushing up prices at the fastest clip in over a decade.
Japan, however, is having the opposite problem. Consumers are paying less for many goods, from Uniqlo parkas to steaming-hot bowls of ramen. While in the United States average prices have jumped 5.4 percent in the past year, the Japanese economy has faced deflationary pressure, with prices dipping 0.1 percent in May from the previous year.
To some extent, the situation in Japan can be explained by its continued struggles with the coronavirus, which have kept shoppers at home. But deeper forces are also at play. Before the pandemic, prices outside the volatile energy and food sectors had barely budged for years, as Japan never came close to meeting its longtime goal of 2 percent inflation.
It wasn’t for lack of trying. Over nearly a decade, Japanese policymakers have wielded almost every trick in the economist’s playbook in an effort to coax prices higher. They have juiced the economy with cheap money, spent huge sums on fiscal stimulus like public works and lowered interest rates to levels that made borrowing nearly free.
But as Japan has learned the hard way, low inflation can be an economic quagmire. And that experience carries a warning for the United States if its current bout of inflation eases, as many economists expect, and its economy falls back into the cycle of weak inflation that preceded the pandemic.
“Most economists, me included, are pretty confident that the Fed knows how to bring inflation down,” including by raising interest rates, said Joshua Hausman, an associate professor of public policy and economics at the University of Michigan who has studied Japan’s economy.
However, “it’s much less clear, partly because of Japan’s experience, that we’re very good at bringing inflation up,” he added.
For consumers, falling prices sound like a good thing. But from the perspective of most economists, they are a problem.
Inflation, they like to say, greases the economy’s gears. In small amounts, it increases corporate profits and wages, stimulating growth. It can also reduce the burden of debt, bringing down the relative costs of college loans and mortgages.
Japan’s inability to lift inflation is “one of the biggest unsolved challenges in the profession,” said Mark Gertler, a professor of economics at New York University who has studied the issue.
One popular explanation for the country’s trouble is that consumers’ expectations of low prices have become so entrenched that it’s basically impossible for companies to raise prices. Economists also point to weakening demand caused by Japan’s aging population, as well as globalization, with cheap, plentiful labor effectively keeping costs low for consumers in developed countries.
The picture once looked very different. In the mid-1970s, Japan had some of the highest inflation rates in the world, approaching 25 percent.
It wasn’t alone. Runaway prices set off by the 1970s oil crisis defined the era, including for a whole generation of economists who were groomed to believe that the most likely threat to financial stability was rapid inflation and that interest rates were the best tool to combat it.
But by the early 1990s, Japan began experiencing a different issue. An economic bubble, fueled by a soaring stock market and rampant property speculation, burst. Prices began to fall.
Japan attacked the problem with innovative policies, including using negative interest rates to encourage spending and injecting money into the economy through large-scale asset purchases, a policy known as quantitative easing.
It seemed to do little good. Still, economists at the time saw Japan’s experience not as a warning to the world, but as an anomaly produced by bad policy choices and cultural quirks.
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That began to change with the financial crisis of 2008, when inflation rates around the world plummeted and other central banks adopted quantitative easing.
The problem has been most notable in Europe, where inflation has averaged 1.2 percent since 2009, economic growth has been weak and some interest rates have been negative for years. During the same period, U.S. inflation averaged just below 2 percent. The Federal Reserve has kept its main interest rate close to zero since March 2020.
Some prominent economists viewed the low inflation as a sign that the U.S. and E.U. economies might be on the brink of so-called secular stagnation, a condition marked by low inflation, low interest rates and sluggish growth.
They have worried that those trends will deepen as both economies begin to gray, potentially reducing demand and pushing up savings rates.
In 2013, under newly elected Prime Minister Shinzo Abe, Japan began its most ambitious effort to tackle its weak economic growth and low inflation.
The government embarked on a grand experiment of huge monetary and fiscal stimulus, buying enormous quantities of equities and lowering interest rates in hopes of encouraging borrowing and putting more money into the economy. As the supply of cash increased, the thinking went, its relative value would decline, effectively driving up prices. Flush with money, consumers and companies alike would spend more. Voilà, inflation.
To encourage spending, Japan adopted a policy, known as forward guidance, aimed at convincing people that prices would go up as it pledged to do everything in its power to achieve its inflation target of 2 percent.
But the government’s efforts at persuasion fell short, so there was little urgency to spend, said Hiroshi Nakaso, a former deputy governor of the Bank of Japan and head of the Daiwa Institute of Research.
Japan found itself in a vicious circle, said Takatoshi Ito, a professor of international and public affairs at Columbia University, who served on Japan’s Council on Economic and Fiscal Policy.
Consumers came to expect “stable prices and zero inflation,” he said, adding that as a result, “companies are afraid of raising prices, because that would attract attention, and consumers may revolt.”
The sluggish economy made companies reluctant to raise wages, he said, “and because real wages didn’t go up, probably consumption didn’t go up, so there was no increase for demand for products and services.”
As inflation hardly moved, some economists wondered if Japan’s stimulus had been too conservative, even as it racked up one of the world’s largest debt burdens.
Policymakers, citing a need to pay off the country’s debts and meet the growing costs of caring for an aging population, hedged against the spending by twice raising the country’s consumption tax, apparently weakening demand.
In the end, Mr. Abe’s experiment, known as Abenomics, may not have been as successful as hoped. But it has informed policymakers’ response to the pandemic, said Gene Park, a professor of political science at Loyola Marymount University in Los Angeles who studies Japan’s monetary policy.
One takeaway, he said, is that governments could spend more than they had ever thought possible without setting off a rapid rise in inflation. Another is that they might have to spend considerably more than they had once considered necessary to stimulate growth.
Japan “has given the U.S. more freedom to experiment with bolder measures,” Mr. Park said.
During the pandemic, Japan, too, has tried to apply the lessons learned since 2013. The government has paid shops and restaurants to stay closed, handed out cash to every person in the country and financed zero-interest loans for struggling businesses.
Prices fell anyway. That was partly at the behest of the government itself, which recently pressured telecom companies to lower mobile phone fees it deemed too high. Most Japanese consumers are also still waiting to be vaccinated against the coronavirus, holding back economic activity.
Even after the pandemic wanes, however, Japan’s inflation rates are likely to stay low, said Sayuri Shirai, an economics professor at Keio University in Tokyo and a former member of the Bank of Japan’s board.
After all, the primary problem remains unchanged: No one is really sure why prices have stagnated.
“The central bank probably doesn’t want to say that they cannot control inflation,” Ms. Shirai said. “Therefore, this issue has just been left without a clear discussion.”