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2023 | OriginalPaper | Chapter

7. Why Has There Been No Inflation in Japan?

Authors : Markus Heckel, Franz Waldenberger

Published in: Inflation and Deflation in East Asia

Publisher: Springer Nature Switzerland

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Abstract

This chapter discusses inflation in Japan. It explains why inflation has not built up despite the extreme expansionary monetary policy by the Bank of Japan. Even amidst the recent global increase in inflation, the inflationary pressure has remained comparatively low in Japan. We argue that Japan’s low inflation is caused by two main factors: a declining and ageing population, and a labour market environment that constrains the bargaining position of employees. A new school of thought called Neo-Fisherism adds an interesting argument to the debate on inflation. Pointing theoretical and empirical research, it suggests that a higher inflation rate can be achieved by raising nominal interest rates. The idea is controversial and has yet to be tested by central banks. We also agree that it would be too risky for Japan to apply Neo-Fisherism, not least because the welfare gains from higher inflation remain dubious.

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previous chapter Inflation Dynamics and Monetary Policy in Taiwan

next chapter Inflation, Price Stability, and Monetary Policy: On the Legality of Inflation Targeting by the Eurosystem

The interest on bank reserves is set by the central bank and—at least partly—reflects the central bank’s policy stance.

Technically, the 2% inflation goal had already been introduced in January 2013.

Monetary base = banknotes in circulation + coins in circulation + bank deposits with the BoJ; see BoJ (2021).

Referring to the complexity of monetary policy (Heckel & Nishimura 2022), Heckel et al. (forthcoming) found that open market operations by the Bank of Japan had nevertheless some positive effects on GDP and inflation. However, for the latter, the impact was not enough to achieve the inflation goal.

Statistics Bureau of Japan, Report on the Consumer Price Index.

Japan’s debt-to-GDP ratio had amounted to 223.5% of GDP in 2019, more than double the level of the government-to-debt ratio in the euro area and in the US (OECD).

The government’s primary balance measures the difference between revenues and expenditures net of debt services (interest payments and debt redemptions).

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Defined as net fixed assets minus dwellings divided by total hours worked, own calculations based upon annual national account statistics.

To complete the picture, it should be mentioned that the 14.24 million loss in working-age population was turned into a 4.17 million gain in employment by mobilising 11.86 million people, mainly women, between 15 and 64 years old to join the labour force, by bringing 0.64 million unemployed back to work, and by increasing employment among the 65+ population by 4.81 million (Statistics Bureau of Japan, Labour Force Survey).

The total contribution will be even higher, as the numbers do not include self-employed foreigners and foreigners who, at some stage, became Japanese citizens. On the other hand, if we put the numbers in relation to the 18.41 million of additionally mobilised employment, i.e., the 4.17 million net increase plus the compensation of the 14.24 million reduction in working-age population, the contribution of migrant work is reduced to 8.6%.

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Title: Why Has There Been No Inflation in Japan?
Authors: Markus Heckel
Franz Waldenberger
Publisher: Springer Nature Switzerland
Book: Inflation and Deflation in East Asia
Print ISBN: 978-3-031-27948-5

Electronic ISBN: 978-3-031-27949-2

Copyright Year: 2023
DOI: https://doi.org/10.1007/978-3-031-27949-2_7