The Economist - UK (2021-11-20)

The Economist November 20th 2021 Finance&economics 77

Inflation

Land of the

falling price

I

nflationis surgingaroundthe world,

with  price  rises  now  exceeding  central

banks’ targets. But Japan is a notable hold­

out.  Although  policymakers  there  have

long sought to generate inflation, consum­

er prices still refuse to budge. In September

they rose by just 0.2% year­on­year, and in­

flation,  excluding  fresh  food  and  energy

prices,  actually  fell  by  0.5%  in  the  same

period. Analysts at Goldman Sachs, a bank,

expect that measure to fall to ­0.8% in the

latest data, which was due to be published

after  this  was  written.  By  comparison,  a

“core” measure rose by 4.6% in America in

October,  3.4%  in  Britain  and  2.9%  in  Ger­

many (see chart).

What’s going on? Japan is not insulated

from  global  trends.  In  October  producer

prices rose by 7.9% year­on­year, the larg­

est  single  increase  since  1980.  The  pickup

was overwhelmingly led by higher import

costs, which rose by 38% in yen terms. The

prices  of  petroleum  products  and  lumber

rose  by  45%  and  57%,  respectively,  com­

pared with the same month last year.

These increases may in small part have

been  offset  by  an  idiosyncratic  factor.

Tumbling  mobile­phone  fees,  driven  by  a

government campaign against carriers, are

pulling down the consumer­price index as

a whole. The communications segment of

the  basket  is  down  by  28%  year­on­year.

Yet  even  if  fees  were  flat,  inflation  would

still be below target. That suggests broader

economic factors are an important part of

the story. 

Entrenched  expectations  built  up

through  decades  of  little  to  no  inflation

play a big role in explaining why rising pro­

ducer  costs  have  not  fed  through  to  con­

sumer prices. Domestic companies are no­

toriously unwilling to pass on increases in

the  prices  of  imports  to  consumers.  At  a

press conference in October Kuroda Haru­

hiko, the governor of the Bank of Japan, at­

tributed this reluctance to habits picked up

during the country’s periodic bouts of de­

flation.  Companies  have  a  good  reason  to

resist  increases.  Last  week  Kikkoman,  a

producer of soy sauce, announced a 4­10%

increase  in  its  prices  from  February.  Such

an event might barely be noticed in Amer­

ica.ButinJapanit madethenationalnews.

Another  crucial  factor  is  the  weakness

of  Japan’s  consumer  recovery.  Private

spending  fell  in  the  third  quarter  of  the

year, and is now 3.5% below where it was at

the  end  of  2019.  Spending  on  durable

goods, the source of much American infla­

tion,  has  been  practically  flat  for  the  past

eight years in Japan. 

The Bank of Japan was an early adopter

of  zero­interest­rate  policies  and  bond­

buying programmes, tools that have since

been  used  elsewhere  in  the  rich  world  as

interest rates hit rock­bottom after the glo­

bal financial crisis of 2007­09. The absence

in Japan of the same inflationary pressures

apparent  across  other  advanced  econo­

mies  once  again  makes  the  country  a  lab­

oratory for economists. 

Despite the Bank of Japan’s activism, in­

flation  has  persistently  failed  to  reach  its

2% target. Its assets ran to 103% of Japanese

nominal  gdpeven  before  the  pandemic,

and  bond  and  stock  purchases  since  have

pushed that share up to 134%. In the same

period,  the  Federal  Reserve’s  purchases

have  risen  from  19%  to  36%  of  American

gdp. The Bank of Japan’s policy to keep ten­

year  government­bond  yields  at  around

0% is still firmly in place, even as a similar

effort at yield­curve control by the Reserve

Bank  of  Australia  was  abandoned  after  it

came under market pressure in October.

This  suggests  that  whatever  is  raising

prices  elsewhere  in  the  world—whether

supply­side  constraints  associated  with

the  pandemic,  demand­side  stimulus,  or

some  combination  of  the  two—monetary

easing alone is struggling to move the nee­

dle  when  confronted  with  decades  of  low

inflation  expectations.  Kishida  Fumio,  Ja­

pan’s new prime minister, has vowed to de­

ploy  a  fiscal­stimulus  package  that  in­

cludes  cash  for  poor  families  and  the  un­

der­18s. Analysts at Barclays, another bank,

expect new spending worth 3.7% of gdp.

These handouts may well nudge up in­

flation,  if  the  money  is  actually  spent  by

consumers ratherthan saved. But for now

Japan  seems  tobethe  place  that  inflation

forgot yet again.n

H ONG KONG

Japan bucks the global trend

Shock resistance

Core consumer prices*, % change on a year earlier

Source:OECD *Excludes energy and food

5 4 3 2 1 0

-1

21201918172016

United States

Japan

Britain

Germany

InvestmentinGermany

Houdini

economics

V

isitorsto murkycornersoftheinter­

netmayencounteradspromising“one

weirdtrick”tohelpthemloseweightorac­

quiremillions.Tomeetitsclimateobliga­

tionsandupgrade its digital infrastruc­

ture,Germanyneedstorustleupperhaps

€50bn($57bn)a yearinpublicinvestment.

Buta “debtbrake”insertedintotheconsti­

tutionin 2009 limitsannualborrowingto

0.35%ofnominalgdp(equivalenttoabout

€12bn). Changing theconstitution looks

impossible.Squaringthiscirclemeansthe

threepartiesnownegotiatinga coalition

agreement,afteranelectioninSeptember,

willneedsometricksoftheirown.

Severalaredoingtherounds.Thefirstis

toestablishoff­budgetpubliccompanies

thatcantapmarketsforfundsdevotedto

specificaims:insulatingbuildings,say,or

charging stations forelectric cars. Deu­

tscheBahn,Germany’srailgiant,operates

thisway.Arelatedbutdistinctproposalis

tobeefupthekfw, thestatedevelopment

bank,toenableittoleverageprivatefunds

forgreeninvestment.Intheoryhundreds

ofbillionscould be raised thisway, al­

thougheustate­aidrulesarea constraint.

Amorecunningruseistogoona one­

offborrowingbingein2022,exploitingthe

temporarysuspensionofthedebtbrake

appliedlastyear,whichallowedthegov­

ernmenttofundfurloughschemesandthe

likeinthepandemic.Expertshavemen­

tioneda sumof€500bn,tobespentover

the next decade. But a badly designed

schemecouldattractthebeadyeyeofGer­

many’sconstitutionalcourt.

Perhaps the cleverest wheeze comes

from Dezernat Zukunft, a Berlin­based

think­tank.Notingthatthedebtbrakere­

B ERLIN

Creativewaystododgethedebtbrake

Over take

Germany, tax revenue*, €trn

*Federal,state and municipal

Sources:Government statistics; Dezernat Zukunft

20181614122010

0.9

0.8

0.7

0.6

0.5

In-year Actual

Forecast made:

1 yearbefore

 years before

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