Japan Learned to Love Deflation in Wage Malaise Facing BOJToru Fujioka
A decade and a half after Japan slumped into deflation, the central bank is set to signal its strongest effort yet to reverse the trend. The biggest challenge may be that the nation has come to rely on falling prices.
More than 80 percent of respondents in a Bank of Japan survey released this month who noticed rising prices last year said it was bad. More than a third of those who said prices fell were happy about it. Even so, the BOJ next week will adopt the government’s desired 2 percent inflation target, according to 21 of 23 economists surveyed by Bloomberg News.
Ending consumer price declines would give companies and households more incentive to borrow, and boost revenue for businesses and the government in a nation that saw its third recession in five years in 2012. The danger: prolonged deflation has altered behavior across the economy, from entrenching declines in pay to driving more than half of savings into cash.
“The key is wages,” said Nobuyasu Atago, principal economist at the Japan Center for Economic Research and a former BOJ official in charge of price data. “Without pay increases, the economy won’t recover and households will only suffer from inflation.”
Japan’s main business lobby signaled it won’t endorse pay rises at regular wage negotiations with labor unions this spring, Kyodo News reported Dec. 20. Prime Minister Shinzo Abe’s Liberal Democratic Party is considering tax breaks for companies that raise pay or expand hiring.
Abe’s administration anticipates the BOJ will adopt a 2 percent target for inflation at its Jan. 21-22 gathering, Vice-Finance Minister Shunichi Yamaguchi said yesterday. The bank and the government will issue a joint statement at the meeting, Finance Minister Taro Aso said today.
People familiar with officials’ discussions said this month the BOJ won’t set a deadline for hitting the target. Last year, the bank set 1 percent as its inflation goal for the time being.
Abe is driving down the yen, with his economic adviser Koichi Hamada telling reporters in Tokyo today that a currency at 95 to 100 per dollar would be good, while a level of 110 would be a problem. The yen was at 90.09 as of 4:05 p.m. after touching 90.21 earlier in the day, the weakest since June 2010.
BOJ Governor Masaaki Shirakawa, whose term ends in April, met today with Aso and Economy Minister Akira Amari. Afterwards, Amari said the government and the central bank are reaching a closer understanding, adding that a U.S.-style employment mandate for the BOJ is not being discussed. Amari moved the yen this week with comments he later said had been misinterpreted. Today, he said that speaking about the currency was the finance minister’s responsibility.
Masaaki Kanno, chief economist at JPMorgan Securities Japan Co., predicts the central bank will adopt open-ended purchases of assets such as government bonds at a rate of 4 trillion yen ($44 billion) per month. Nomura Securities Co. sees 2.5 trillion yen.
All 23 economists expect the BOJ to expand asset purchases at the meeting, with the median forecast for a 10 trillion yen increase in the asset-purchase program, the BOJ’s main policy tool amid near-zero interest rates. The central bank boosted the fund to 76 trillion yen from 66 trillion yen in December.
The BOJ’s public opinion survey, which polled 4,000 people nationwide from Nov. 8 to Dec. 4, showed that about two thirds of respondents think economic growth will get weaker.
“I just can’t believe the inflation target will feed into wages after experiencing two decades of decline of Japan’s economy,” said Yasuo Miura, 55, a taxi driver in Tokyo. “After having deflation for so long, people are not spending. My revenue has dropped about 30 percent over 20 years.”
Japan last had 2 percent annual inflation in 1997, when Toyota Motor Corp. unveiled the Prius hybrid and the yen sank as as low as 130 per dollar. Prices have fallen in 10 of 15 years since, according to data compiled by Bloomberg.
While deflation helps savers, younger generations are hit by stagnant wages and diminished incentives for borrowing. Unemployment among those aged 15-24 was 6.5 percent in November, compared with an overall rate of 4.1 percent. Wages have failed to rise for nine of the past 12 months. About 56 percent of household assets were in cash or bank deposits at the end of September, according to a central bank report.
“Adopting the inflation target may widen the gap between rich and poor,” said Atago. “The rich have assets to invest to take advantage of a weaker yen, higher stock prices and yields. The poor will be the last to benefit, if ever.”
Masamichi Adachi, a senior economist at JPMorgan in Tokyo and a former central bank official, said that Abe may tone down his calls for 2 percent inflation if wages fall behind price growth and the government loses public support.
“Elderly Japanese have more power to influence elections,” said Adachi. “Many of them don’t have abundant wealth. Politicians can’t ignore that.”
One in every four people in Japan will be older than 65 in 2014, compared with 9.6 percent in China and 14.2 percent in the U.S., according to data compiled by the U.S. Census Bureau.
Masayuki Kichikawa, Tokyo-based chief economist at Bank of America Merrill Lynch, said the economic impact of monetary policy will take “a few years” to appear, with a delay between rising profits and higher wages.
“Deflation allows an aging population to take advantage of younger people who haven’t seen any wage increases,” Kichikawa said. “It may be time to transfer some of that fortune from the old to the young.”