The country where inflation is good news – Ipoca Negosios

The country where inflation is good news – Ipoca Negosios

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The BoJ aims to keep inflation at around 2%, a level considered good; Today it is 0.9% according to February data (Image: Getty Images via BBC)

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At a time when a wave of inflation is shaking the world’s economies and driving up food, gasoline and rent prices, one country is left out of these frightening numbers.

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According to the Food and Agriculture Organization (FAO) Food Price Index, world food prices have reached their highest levels since 1990.

In this scenario, Japan posted a 0.9% rise in consumer prices in February, compared to 7.9% in the US or 6.2% in the European Union.

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In Brazil, the annual inflation rate for March was 11.3%. Chile had 7.8% in February, Mexico 7.2% and Colombia 8.1% (Argentina and Venezuela scored 52.3% and 340.4%, respectively, but these are two exceptions).

But unlike the rest of the world, Japan wants its inflation to be higher, and for years it has been implementing measures to try to achieve that to no avail. The central bank’s goal is for inflation to remain at around 2%, which is a healthy level.

The BoJ manager has already said that he will not raise interest rates as the world's major economies do.  (Photo: Getty Images via BBC)

The BoJ manager has already said that he will not raise interest rates as the world’s major economies do. (Photo: Getty Images via BBC)

How can the effect of undermining the purchasing power of citizens be welcome?

Basic economic models show that a modest level of inflation is what fuels an economy’s growth. Economists who think this way argue that Japan’s downturn is the reason for its slow growth,” explains Professor Ulrike Shaide, of the School of Global Positioning System (GPS) Strategy at the University of California.

That is, without inflation it is difficult for the economy to grow. Imbalances only start when these price changes – a sharp rise or a sharp fall – are exaggerated.

Rising prices for energy, fertilizers and staple crops such as wheat, due to Russia’s war with Ukraine, have led the country to post its highest annual rise in 30 years. Despite this, the price increase is still lower than in the rest of the world.

low consumption

What makes Japan different is that after decades of deflation, its citizens are deeply reluctant to consume at higher prices.

Unlike the rest of the world, Japan wanted its inflation to be higher (Image: Getty Images via BBC)

Unlike the rest of the world, Japan wanted its inflation to be higher (Image: Getty Images via BBC)

Hiroyuki Ito, chair of the Department of Economics at Portland State University: “If you think the prices of things you need will fall as a result of deflation, you put off buying and wait.”

And if you think that prices will be higher tomorrow than they are today, you will probably decide to buy as soon as possible.

Deflation means that companies in Japan rarely attempt to raise prices and that wages remain at similar levels for years.

“Consumers are encouraged to delay spending and companies miss opportunities to adjust prices to improve their margins. As a result, it is difficult to meet the potential growth rate,” says Junichi Inoue, Japanese equity manager at Janus Henderson.

A few months ago, the soy sauce-producing brand Kikkoman announced a 4-10% increase in its prices. News like this would pass in the US, but it made headlines in Japan.

But is it good or bad for Japan to suffer some inflation?

Experts agree that, in principle, it is good, but it depends.

Japan has struggled with zero or negative inflation for years (Image: Getty Images via BBC)

Japan has struggled with zero or negative inflation for years (Image: Getty Images via BBC)

“Japan has been struggling with zero or negative inflation for years. But that doesn’t necessarily mean high inflation is a good thing, it just depends on why,” says Ken Kuttner, professor of economics at Williams College in Massachusetts.

The current inflation is caused by external factors and is mild and transient in nature.

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Japanese manufacturers not only face high labor and logistics costs, but also soaring raw material prices, among other factors.

Ideally, inflation should be permanent and come from internal factors such as rising wages or increased consumption.

The hope is that one inflation will lead to another, says Hiroyuki Ito. This will be a paradigm shift for Japan.

“The current inflation is good news for Japan, but only partially,” says the economist. “We can say that when the economy is in what Japan is in, inflation can be good, but it’s not the best kind.”

Japan has one of the highest life expectancies in the world: 84.2 years on average (Image: Getty Images via BBC)

Japan has one of the highest life expectancies in the world: 84.2 years on average (Image: Getty Images via BBC)

“And the reason I said partly is that if inflation was driven by strong demand, that would be very healthy for the economy. But now because of supply chain issues, the pandemic and, most importantly, the war on Ukraine, which contributed to raising the price levels of raw materials.”

Among the factors that have contributed to little or no inflation in Japan, economists cite an aging population as well as a lack of foreign labor.

“Japan’s slow economic growth is largely a reflection of its low population growth rate and labor force growth rate of just 0.1%,” said Tachishi Tashiro of the Peterson Institute.

Since there are no children or immigrants, the expectation of a population paying pensions for their work is diminishing, and residents feel they have to save or the moment will come when they will be unprotected.

“The Japanese are worried about the future and whether they will get enough pensions when they get older,” Ito says.

Japan wants to attract 345,000 foreign workers over the next five years (Image: Getty Images via BBC)

Japan wants to attract 345,000 foreign workers over the next five years (Image: Getty Images via BBC)

This makes them save a lot and consume less.

Given all of these factors, it remains to be seen whether the slight price hike the country is experiencing will be strong enough to give the economy a boost that has remained largely unchanged for decades.

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