Financial and Monetary Systems

Japan has the lowest inflation of all major economies but will continue feeling the pressure. Here's why

Fresh produce at a market in Japan

Inflation in Japan is the lowest among major economies. But with stagnating wages, consumers are still feeling the pressure of price hikes. Image: Unsplash

Naoko Kutty
Writer, Forum Agenda
Naoko Tochibayashi
Communications Lead, Japan, World Economic Forum Tokyo
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  • Inflation in Japan is the lowest among major economies, with the consumer price index rising 2.8% in August, compared with 8.3% in the US and 9.1% in the EU.
  • This is because the Bank of Japan has continued pursuing a large-scale monetary easing policy.
  • But with stagnating wages, Japanese consumers will still feel pressure from price rises.

The Bank of Japan (BOJ) has decided to stick to its monetary easing policy amid accelerating global inflation growth. Inflation in Japan is the lowest among major economies, with the Consumer Price Index (CPI) rising 2.8% in August, compared to 8.3% in the US and 9.1% in the EU. Even so, infrastructure costs, such as electricity and gas rates, have increased by more than 20%, and food prices have risen by around 10%. This has come as a big shock to the public in Japan, as the country has not experienced price hikes for decades.

There is now a widening interest rate gap between Japan and the West. The leading cause is the difference in monetary policy stance between BOJ, which continues to pursue large-scale monetary easing, and Western central banks, which are rushing to tighten monetary policy to curb record inflation. BOJ is now the only major central bank in the world with a negative interest rate policy, and it has stated that it will not raise interest rates for the time being.

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Japan's persistently low inflation rate is largely a product of its economic policy. From 2013-2018, under the second Abe administration's “Abenomics” economic policy, the monetary base was rapidly expanded through quantitative and qualitative easing. This was introduced by Haruhiko Kuroda, the Governor of BOJ, as one of the three “policy arrows” that Abenomics was based upon. It aimed to break out of the prolonged strong yen and deflationary recession that had stagnated the Japanese economy from 1993 until around 2013.

The persistently low inflation rate in Japan is largely a product of its economic policy.
The persistently low inflation rate in Japan is largely a product of its economic policy. Image: The Economist

However, this policy did not noticeably increase the money stock. The average GDP growth rate of the Japanese economy until October 2018 was 0.9% in real terms. In effect, the policies smoothed the way for large exporting companies and the wealthy while simultaneously holding down wages and raising the consumption tax. So there was an economic recovery of sorts, but with no real increase in household incomes. This has reinforced the sluggish growth of personal consumption and economic stagnation and is thought to be one of the reasons for the moderate price rise.


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Since the spread of COVID-19, the Japanese government has been spending a huge amount of money, but only a small portion has gone to support households. This seems to be another reason why prices have not risen as much as they have elsewhere.

Since wages are unlikely to rise in Japan, the risk of economic turmoil due to severe inflation caused by wage-price spirals, as in the United States and Europe, remains low. On the other hand, there are a cumulative total of more than 20,000 food products for which price hikes are scheduled during the year, and as incomes are not growing, the burden on households is significant even at the current low inflation rate.

Average wages in Japan have remained virtually unchanged for the past 30 years. According to global average wage data published by the Organization for Economic Cooperation and Development (OECD), Japan's average annual income ranks 24th out of 35 countries, second from the bottom among G7 countries.

With no signs of an end to global inflation and many consumers in Japan feeling the pressure of rising prices as their salaries fail to rise, measures to overcome the difficulties are urgently needed.

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