Japan has better chance of seeing end to deflation: gov't white paper
TOKYO (Kyodo) -- Japan stands a better chance of finally breaking with deflation that has "shackled" the nation for a quarter of a century, amid recent strong wage growth and broadening price hikes, the government said Tuesday in its annual economic and fiscal policy report.
The government has yet to formally declare an end to deflation because current rising prices are largely due to higher import costs and there is still uncertainty over the sustainability of wage growth, a key factor in determining whether deflation is a thing of the past.
Ideas:
Recent wage growth, while good, is not as good as it should be. For example up to 70 percent work force in Japan work for small and medium sized companies and many of them didn't get a wage increase as only large companies gave raises.
The average wage increase was about 3.5 percent which is below the level of inflation in Japan. If the weak yen and its variance with the US dollar was a big as it is, maybe import product prices maybe be as high.
Until wages are high enough and enough companies, both small, medium, and large companies, deflation will continue to be a part of the Japanese economy.
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But while such cost-push factors, rather than strong consumer appetite, may have been driving up inflation in recent months and increasing household burdens, they are also changing people's price expectations, according to the white paper presented to a Cabinet meeting on Tuesday.
"We should not overlook the fact that Japan has an opportunity to emerge from deflation, given that recent price gains have served as a trigger for consumer inflation expectations to heighten and for prices, which were pegged to zero, to rise," the report said.
Ideas:
Cost-push inflation is just companies passing on their supply and energy costs to the next in the supply chain, including the final consumer.
While households have become increasingly burdened because of inflation, there might be a sense of acceptance with the higher prices and maybe consumers will find a way to continue to spend.
Eventually over-time, consumers find ways to accept the higher prices, that are within a certain price range, and just continue on with their lives and the higher prices.
When will Japanese consumers begin to feel comfortable with this higher prices in the economy, most likely when consumer demand and consumer spending is trending upward and not downward.
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For deflation to officially end, Japan must judge there is no prospect of returning to a situation in which prices continuously fall.
The government said it must coordinate closely with the Bank of Japan and guide economic policy by carefully examining macroeconomic conditions.
Ideas:
If companies see and feel they can increase prices and not lose customers in the process, then most likely deflation has ended in Japan, and consumer spending will be back to normal or a new-normal.
But it might take some time, as many households are still constrained at this time. Its going to take a change in mindset and a change in spending habits for Japan to move out of deflation, as for too long, and understandably, Japanese consumers/households got used to the lower prices in Japan.
Again, wage increase will play a big part in ending deflation, as more and more wage earners get wage increases they will begin to feel good about their take-home pay and begin, eventually to spend some of it in the economy without the worry of higher prices.
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"It is necessary to ensure an end to deflation by dispelling the deep-rooted deflationary mindset (among consumers) and boosting growth expectations."
Japan's inflation rate has already hit its highest level in over four decades and has stayed above the BOJ's 2 percent target for more than a year. But the government and the central bank expect inflation to slow in coming months as the effects of high import costs fade.
Ideas:
Japanese consumers have gotten used to 30 years of deflation and its not going to be easy to change their mindsets about prices and the economy. Only if a majority of workers can get significant wage increases, then eventually Japanese consumers will get to the higher prices and begin spend.
A 2 percent target goal is good but rarely does the Bank of Japan, or any central bank, have control over inflation. as most banks just respond for the most part and don't do much really to prevent inflation.
Inflation may indeed be slowing in the coming months, but households still have to deal with the inflation as is even if decreases only slightly.
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Companies have been relatively quick to pass on surging import costs of raw materials to their retail goods prices, but service prices have been more or less flat. Economists are keeping tabs on whether price hikes will further spread in the services sector.
The BOJ, meanwhile, is bracing for upside risks to the inflation outlook and has already tweaked its monetary policy by loosening its grip on long-term government bond yields that tend to rise when economic conditions improve.
Ideas:
Japanese companies, for a very long time, were reluctant to pass-on their costs to their customers as they felt they would too many customers.
But as their profit margins have continued to shrink now they feel they have no choice as profits keep decreasing.
Service sector companies were hit hard during the pandemic and now, as the pandemic as ended they might be reluctant to increase prices now as they are still trying to recover their customer base.
The Bank of Japan might have loosened its monetary policy slightly, but its has a long way to go to get its monetary policy in-line with other advanced economies.
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Accelerating inflation is a headache for Japanese households, with real wages continuously falling despite the annual pay negotiations between management and labor unions for fiscal 2023 turning out to be the best in about three decades.
As the economy recovers from the COVID-19 fallout supported by pent-up demand for services, the spotlight has been increasingly on labor shortages in sectors hit hard by the pandemic.
Ideas:
While the wage increases for large companies was on average about 3.5 percent, the majority of wage earners in Japan, about 70 percent, didn't get a wage increase.
So wage increases have a long way to go for households or consumers to feel good about spending normally again, as inflation is still in Japan, and might be through 2024.
Again, the services sector was hit hard by the pandemic, and maybe had to layoff a significant number of its workers.
The problem now is there is a service sector labor shortage and many service sector companies can't find the workers they need.
If they would higher wages then maybe more workers would want to work in service sector jobs but service sector type jobs don't pay good salaries and some or many are minimum wage type jobs.
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The white paper noted that Japan has entered a phase in which wages can rise easily due to tight labor market conditions. It also underlined the need to improve labor productivity, reskill the workforce and facilitate job-hopping for better pay and working conditions.
Financial worries, especially among younger generations, are seen as part of the reason why Japan has been struggling to reverse the dwindling birthrate and Prime Minister Fumio Kishida has vowed to boost the state budget for childcare support drastically because now is the "last chance" to change the trend.
Ideas:
Many companies might see the need to increase wages to get more talented workers or even to get workers, but the challenge is their bottom lines or profits margins might not allow the wage increases that are needed to attract talented workers or even get new workers.
Labor productivity has been a challenge in Japan for a very long time, as for the most part, Japanese companies are too rigid and not reluctant to change.
The government should have programs or policy which provide for job hopping/changing incentives. They should makes it easier ,more flexible, for workers in Japan to change jobs easily. A more flexible labor market will increase economic growth.
What Japan needs is better policies for getting people young foreign workers into Japan, which they can raise their families and the population will increase.
For example, one estimate stated that the US, needs 3 million new legal immigrants a year as its birth rate is falling too.
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This comes as increased fiscal spending to support households and businesses during the pandemic and recent inflation have put fiscal restoration on the backburner. Japan's fiscal health is the worst among advanced economies with debt more than twice the size of the economy.
"The government should put more focus on tackling the declining birthrate or spurring corporate investment over the mid- to longer-term than emergency spending to support people's livelihoods and stimulating demand," the document said.
Ideas:
While its important to support households and businesses in Japan, its another thing to think about the debt the government has, as yes, it will eventually become a major challenge for the Japanese economy.
But what is the major priority, bring down the debt or help families and businesses. The UK back around 2010 tried austerity and it doesn't work too well. The same with the EU around the same time, as more were less well off than before.
Unfortunately, politics always gets in the way of policy, that in the long term might be good for the economy, but might cause some short-term pain.
Peoples livelihoods will always take precedence over the polices that might help the economy, and bring not too much short-term results.
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The government is expected to extend its fuel subsidy program beyond this fall while Kishida has unveiled plans to draw up a fresh economic package next month.
A total of 141 trillion yen ($964 billion) was allocated to steps to cope with COVID-19 and inflation over the three years to fiscal 2022, of which 128 trillion yen was funded by government debt issuance.
Ideas:
Has the fuel subsidy program had any real affect on households and have wholesalers been able to benefit from the subsidy program.
Japan, compared to some advanced economies seems to be big spending economy, and it loo like its going to change any time soon.
The challenge is, even for the US, is once governments start to spend, they can't seem to stop as balancing the budget is no longer the priority of the government.
But as Japan's debt to GDP ratio is now twice the size of economy, it might need drastic measures to lesson the debt overtime.
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The white paper raises the alarm about a recent rise in the issuance of short-term, one-year government bonds, in relation to longer ones. The BOJ already owns about half of the outstanding government debt as part of its aggressive monetary easing.
"When the percentage of short-term bonds increase, this will make (the nation) more directly impacted by bond price fluctuations caused by external factors," the white paper said. "The pace of increases in debt-servicing costs will also quicken."
Ideas:
The Bank of Japan, most likely is not too concerned with its debt and how much it owes, as its more focused on managing the inflation and most likely will begin think about how the debt will challenge the economy in the future.
If the Japanese government or the Bank of Japan were really concerned about it debt challenges, they would have tried to solve them or reduce a long time ago.
But the reality is, households and businesses take priority over government debt challenges and always will in Japan.
The Japanese governments and the Bank of Japan might talk about it but most likely nothing will be done at this time.
Have a nice day and be safe!
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