Commentary / Japan

Japan's struggles are hardly unique

by Daniel Moss

Bloomberg

Victory in Japan’s battle with too-low inflation looks as elusive as ever. On Thursday, the Bank of Japan pushed back its estimate of when it will hit its 2 percent inflation target; the goal now won’t be reached until the year beginning April 2019, according to Gov. Haruhiko Kuroda.

The delay would seem to confirm that Japan remains subject to a unique “deflationary mindset” that’s nearly impossible to eradicate.

In fact, what’s interesting isn’t how singular Japan’s problems are, but how common. While they may vary in degree, they’re increasingly shared by policymakers across the developed world.

With no one predicting a change in interest rates at the conclusion of the BOJ’s two-day Policy Board meeting, the quarterly forecasts were always going to be what garnered attention. The stickiness of anemic inflation must be especially galling to Kuroda and other officials, given that Japan’s economic recovery is picking up a little bit of steam.

Consumer prices are now in positive territory — rising 0.4 percent in May — and gross domestic product has grown for five quarters, the longest uninterrupted spell since the global financial crisis. The unemployment rate, helped by a shrinking population, has hovered around 3 percent for a year.

Even the BOJ projections that kick the 2 percent inflation target into the long grass expect the current economic expansion to continue for a couple more years.

Surely then, the models suggest, wage pressures must kick in meaningfully at some point, especially given how tight the labor market is. And that, in turn, should push inflation back to 2 percent.

But the models have been wrong to this point — and not just in Japan. In the eurozone, where things are looking better economically than they have in years, the rebound hasn’t translated into a surge in inflation. While the European Central Bank is likely to reduce its stimulus accordingly in coming months, it’s likely to do so very gradually.

In the U.S., where the Federal Reserve has increased interest rates twice this year, a string of inflation misses is similarly giving some policymakers pause over how fast to proceed. Lael Brainard, an influential Fed governor, told an audience at Columbia University recently she wants “to assess the inflation process closely before making a determination on further adjustments to the federal funds rate in light of the recent softness.” Charles Evans, president of the Chicago Fed, has discussed the need to assure Americans that the Fed isn’t just a bunch of “conservative central bankers who view our inflation target as a ceiling.”

Few policymakers around the world would claim to have a handle on what’s happening here. It’s not a uniquely U.S. or German or Japanese phenomenon. Some Fed officials have mused in recent months about whether changes to cellphone pricing and the cost of prescription drugs help explain inflation’s retreat since hitting 2 percent in February. But even if they’re right, that doesn’t explain how widespread the problem is globally.

The trend could reflect the lingering aftereffects of the global financial crisis. Or perhaps consumers outside Japan have succumbed to what one might call a “disinflationary mindset.” Some people blame cheap imports resulting from expanded global trade, although that’s been a process underway for decades.

That’s not to say Japan doesn’t face some unique challenges. Its rapidly shrinking population, coupled with technological advances that keep retail prices in check, may be too big a hurdle for Kuroda, or any BOJ governor, to overcome. BOJ officials feel let down by labor unions that, they complain, haven’t been anywhere near aggressive enough in annual wage negotiations with employers — hardly a problem in the West.

Kuroda also has to contend with a national psychology that can’t seem to shake the idea of ultralow inflation or, even worse, the notion of a return to deflation.

At least policy doesn’t need to be loosened again anytime soon, Kuroda said at Thursday’s news conference after the Policy Board meeting. And he may not have to wrestle with this conundrum much longer. His term ends in April and no BOJ leader has been reappointed since the bank gained independence in the late 1990s. Given how widespread and intractable these challenges are proving to be, he may well find that statistic a relief.

Daniel Moss has been the executive editor of Bloomberg News for global economics. He has led Bloomberg News teams in Asia, Europe and North America.

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