LONDON -- Economists like limited inflation. They reckon it helps growth. Perhaps it may in some circumstances. It also benefits those who have borrowed against assets, which rise in value in an inflationary environment. But even limited inflation can be damaging, especially to those on fixed incomes, such as annuities, without provision for increases linked to inflation. Falling prices can be beneficial, and may indeed be necessary after a period of asset-price inflation, such as has been the case in Japan.
Most observers accept that the high cost of living in Japan has forced up wages and salaries. High labor costs have made it difficult for Japanese companies to compete internationally. They have had to compensate with increased productivity. This has been largely achieved through high levels of education and training and by capital investment.
Expenditure on training has benefited the economy both in the short and the long term. Capital investment has also brought economic benefits and contributed to growth. But there are limits to the extent to which these two factors can counteract the negative impact of high labor costs. The impact could be reduced by a fall in the value of the currency, but in the case of Japan, with its generally favorable balance of trade, the yen seems likely to remain relatively strong. Moreover, currency volatility can undermine competitiveness over the longer term.