Its central bankers are increasingly hopeful
Japan is used to the position in which it currently finds itself: apart from the rest of the rich world. Elsewhere, as inflation exceeded central-bank targets, rate-setters tightened monetary policy in rough proportion to the size of their overshoot. If the Bank of Japan had behaved in a similar manner to its G10 peers, notes Tim Baker of Deutsche Bank, the country’s interest rates would have increased by two percentage points over the past few years. Instead, they barely crept up, rising from -0.1% to 0.25%, despite nearly three years of price growth above the BoJ’s target of 2%.
That is because Japanese policymakers would like to kill off the country’s disinflationary decades once and for all. They received a gift when the current wave of inflation arrived from overseas. In 2021 and 2022, as import prices surged and the yen plunged, Japan received a whopping cost shock. Companies had little choice but to pass on higher costs, in the process breaking a taboo against price rises. Workers, in turn, received a strong incentive to seek higher wages. The BoJ’s policymakers were pleased: they hoped to turn a bout of external “cost-push” inflation into internal “demand-pull” inflation, by way of a virtuous feedback loop between wages and prices.
Now the central bank is beginning to change tack. On January 24th policymakers raised interest rates for the third time this cycle. Their growing confidence mostly stems from the national pay picture. Since last spring, nominal base wages for full-time workers have risen at a rate of nearly 3% year on year. So have services-producer prices, a leading indicator for broader services inflation, which is sensitive to wage growth.
Analysts expect a second year of pay rises near 5% following shunto, annual wage negotiations between firms and unions that will conclude in March. Moreover, inflation expectations are reaching a “screaming point”, says David Bowers of Absolute Strategy Research, a consultancy. Surveys of businesses’ and consumers’ medium-term inflation expectations are at, or approaching, record highs. “It has now become possible to envision achieving the price-stability target in a sustainable and stable manner,” said Himino Ryozo, the BoJ’s deputy governor, on January 14th.
Reference to the Article: Has Japan truly escaped low inflation?
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