In the 90s of the last century, Japan's bubble economy burst. Since then, Japan has entered an "era of deflation" that has lasted for 30 years. How to get rid of deflation has become an important issue for the Japanese government in the long run.
In the wake of the pandemic, the global inflation, which had once become history, hit hard and had an impact on Japan. Since 2022, there has been a lot of news about rising food prices in Japan, and the price system has changed a lot, but deflation is still the biggest problem for people living in Japan, and prices have risen, but wages have not risen.
Japan may be at the brink of the worst, and at a crossroads where it needs to make a choice.
In his new book "Inflation or Deflation: The Myth of the Global Economy", renowned Japanese scholar No. Watanabe provides a new perspective on understanding Japan's deflationary predicament, and expounds the unique opportunities and great challenges facing Japan in the era of great inflation by analyzing Japan's policy measures to deal with deflation. It provides an important reference for China to stabilize economic growth and prevent inflation and deflation.
Part 1：
How has the wage-price paradigm hindered Japan's development?
Since the mid-90s of the 20th century, when the economy fell into a trough, Japan has had extremely low prices for 1/4 century, with prices for goods and services almost unchanged.
And all of this stems from the change in consumer expectations. Consumers are worried that the financial crisis will trigger job losses and they are starting to save money. In this process, consumers are more sensitive to prices, and companies do not dare to raise the price of their products, and all operators adopt conservative strategies and freeze wages. Based on this consideration, both prices and wages suddenly stopped rising against the background at that time.
However, in the 21st century, Japan's economy has entered a boom channel, but prices and wages are still low and frozen, and this state continues to this day. This is no accident, for consumers, if wages are frozen and prices rise, daily life will be unsustainable; For companies, if wages rise and product prices remain unchanged, business operations will also be in trouble, so it is not feasible to freeze prices without freezing wages. As a result, prices and wages were frozen at the same time, which was considered an "equilibrium compromise point" between the two.
The reality is that consumers want to raise wages and companies want to raise the price of their products, but if no one is doing so, it is a good idea to keep both sides the same. It is for this reason that the wage and price freeze has persisted to this day.
For the Japanese, it has become the norm for the price of products not to rise, and it is a matter of course. According to this common sense, if you find that a store that shops frequently has an increase in price, people will usually think that the price increase must be caused by some special factor, and that other stores may not increase their price without a special reason. Since it is expected that other stores will be cheaper, it is natural that they will not buy goods with increased prices at the original store, but will turn around and buy at other stores.
Not only are Japanese consumers not expecting price increases, but Japanese companies are also aware of this, and they are reluctant to raise product prices even if there is an increase in raw material prices. The coexistence of consumers' "hateful price increases" and companies' "price freeze practices" has become a matter of course for people living in Japan.
This kind of society is naturally called a "social norm" in economics, and the phenomenon that prices and wages should be frozen is called the Japanese "wage price paradigm." When former Japanese Prime Minister Shinzo Abe was in office, he launched a package of financial, fiscal and economic structural reforms in an attempt to change the mindset of the Japanese people. At the heart of this package is the Bank of Japan's epoch-making quantitative easing monetary policy. In other words, it sends a strong signal that the money supply will continue to increase not only now but also in the future.
The epoch-making monetary easing policy did lead to a sharp depreciation of the yen, but when the effect of the policy spread to rising prices, the Japanese people began to complain that the price had risen without raising wages, and as a result, the paradigm reform had failed.
Part 2：
After the pandemic, new opportunities are coming for Japan?
At the beginning of 2020, the world was suddenly threatened by a novel viral pandemic. Our lives were immediately changed, with economic activity rapidly stalling and the global economy plunging into a rapid recession. The outbreak of the pandemic has challenged the economic system in a completely different paradigm, paralyzing the global logistics network built by the rapid development of economic globalization in the 21st century, cutting off the global supply chain network and causing global product prices to rise.
However, real inflation did not come at the same time as the pandemic, but there is a certain time lag. In the wake of the pandemic, the behavior of workers and consumers has not returned to business as expected, but has gone off track. For example, employees who are accustomed to working remotely are refusing to return to their old factories or offices, and consumer behavior is changing unexpectedly. In order to avoid crowded places, or to maintain physical distance from others, our lifestyles have changed. In line with this, where and what is consumed has changed. Those products that consumers consume intensively have caused prices to rise due to insufficient production capacity.
After the pandemic, the expectations of the Japanese people regarding inflation have changed. Japan's Cabinet Office conducts a monthly "Consumption Trend Survey" of about 8,400 households, which also includes an option for the expected inflation rate in the coming year. According to the survey results, the increase in inflation expectations, which began in the fall of 2020, has increased by 4% so far. Real inflation rose 3.5% over the same period, suggesting that expected inflation is rising faster than actual inflation.
Japanese companies are also considering changing their actions when their inflation expectations have risen and their mentality of hating price increases has changed. The reason why companies did not raise prices before was because they were worried that the price increase would lose customers, but now they don't have to worry so much about customer loss, and they may change the practice of freezing prices. While consumers have to accept higher prices, this is unsustainable without a change in the wage freeze. The fundamental solution to the paradigm is to abandon the practice of "prices and wages remain unchanged" and shift to a paradigm in which "prices and wages are rising."
In fact, Japan is now at a fork in the road, and there are two paths ahead: one is to continue to maintain the current paradigm and have a stagflationary situation; The other is to turn to the same paradigm as European and American countries and return to normal countries. If we follow the first path, prices begin to rise without changing wages, and the real purchasing power of workers falls, the only way to survive is to thrive. As a result, people's consumption has declined, and the growth of GDP growth has also decreased.
At the moment, Japan has the opportunity to develop along the second path. Inflation expectations have increased, and consumers' aversion to price increases has begun to improve, and Japanese consumers have become not much different from their European and American counterparts. Now it's the turn of the business to act. The ability of companies to confidently pass on the cost burden to product prices is the primary obstacle to ending the practice of not raising prices.
Another obstacle is whether companies can be proactive in raising wages. For this problem, companies are not only slow to act, but also very pessimistic about the future wage increase expectations, compared with Europe and the United States. It is still impossible to tell where Japanese society will go in the future, but there is no doubt that Japan is facing a major choice that has not been seen in decades.
Part 3：
How can Japan break out of the wage-price spiral?
A wage-price spiral refers to a process in which rising wages lead to rising prices, which in turn prompt workers to demand higher wages. Such a process could lead to an increase in inflation, affecting economic stability and development.
For Japan, inflation is still low, and there is no need to worry about a spiral of wages and prices, but this is not to say that Japan has nothing to do with this wage-price spiral.
The most important feature of the wage-price spiral that European and American countries are worried about is the self-realization mechanism of inflation expectations, which also appears in the Japanese-style spiral model, that is, the reason why workers do not ask for a wage increase is that the expected inflation rate is zero, and because the wage rises to zero, the capitation fee does not change, and the company decides not to raise the price, so that the inflation expectation of workers determines the actual inflation rate through the actions of workers and companies. This mechanism is the same as the orthodox spiraling mechanism.
The wage-price spiral in Europe and the United States can adopt monetary tightening to cool overheated demand, which is the orthodox treatment. But cooling demand will be accompanied by an increase in unemployment, and excessive unemployment costs may be beyond the capacity of society. In this situation, policy objectives have to be changed, and what needs to be considered is the direct regulation of wages and prices, which is the "alternative" treatment for heretics.
The same is true of the Japanese-style wage-price spiral, which is first adjusted according to the orthodox treatment plan, except that Japan stimulates demand, and for this it needs to lower interest rates. As interest rates fall, the unemployment rate will be lowered, so there is no need to worry about the unemployment rate seriously exceeding the social capacity as in Europe and the United States. But orthodox treatment options also have limitations, that is, the limitation of lower interest rates, negative interest rates cannot be reduced to any desired extent. Once the lower bound is reached, interest rates cannot continue to fall, and demand cannot continue to be stimulated. This is the situation when interest rates in Japan fell to zero around 2000.
Due to the limitations of orthodox treatment options, Japan had to turn to "alternative" treatment options for heresy. Because the situation in Japan is that wages and prices are frozen, what Japan needs is not direct control of wages and prices, but an "unfreeze". In Japan, we will take action based on the expectation of "achieving the 2% inflation target set by the Bank of Japan" as an expectation shared by all stakeholders. First, workers or unions demand a wage increase consistent with the 2% inflation rate, and secondly, the company accepts the workers' demand for a wage increase and increases the price of the product according to the increase in the capitation fee, so that the inflation rate of 2% can be achieved.
One of the hardest aspects of this chain of actions is stakeholders sharing 2% inflation expectations and acting accordingly, which is also a problem faced by countries with traditional spirals. For example, workers are not asking for a wage increase that is consistent with a 2% price increase
(and still remain the same as before), companies will not raise the price of their products, this is due to the fact that when consumers are short on their hands, once a price increase is proposed, the business will lose customers. On the other hand, if the company cannot raise the price by 2% and the price remains unchanged, it will not be able to accept the employee's request for a wage increase, and even if the employee asks for a wage increase, the company will have to reject the employee's request for a wage increase, realizing that the profit will deteriorate, and the employee's insistence on making a strong request for a wage increase may endanger the employee's job.
Whether Japan can seize the period of great global change, break the "wage-price spiral model", and achieve a wage thaw has reached a critical juncture.
Book Recommendations:
"Inflation or Deflation" tells the real cause of rising prices around the world and its impact on consumers, workers and businesses from the perspective of the "post-pandemic era".
In addition to describing the changing situation in the world economy, the book also analyzes Japan's special difficulties in both deflation and global inflation. In addition, the book explores how central banks respond to the problem of high prices and their limitations, giving readers a global perspective on economic analysis.
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