Japanification takes are opinions: everybody’s got one.
Its historic eight-year stretch of negative interest rates and its battle with deflation are held up as an “experiment” for the rest of the world, while its ageing population is extolled as a “crystal ball” into what demographic decline implies for inflation and growth in other advanced economies.
There’s a common consensus: Japan’s demography is one of, if not the, root causes of its deflation challenges, an economic phenomenon dubbed as “shrinkonomics”.
Shrinkonomics is characterised by low investment, as few wish to pour money into enterprises and corporations with a steadily declining consumer base, and low spending, as the population contains an increasingly large proportion of people either saving for retirement or living off of fixed incomes in retirement. Simultaneously, a smaller and smaller population has to fill a once-larger economy, resulting in oversupply of shelter, commercial real estate, and infrastructure — further driving down prices.
This all leads to a whirling cycle of low demand, stagnant growth, persistent deflation, and back round again.
To escape this deflationary morass, Japanese monetary policy has pursued an illusive virtuous cycle — in which higher wages stimulate higher consumption, leading to higher prices and profits, and in turn another bout of higher wages, and so on and so forth until inflation resumes a growth trajectory.
So it was with a degree of triumph that the Bank of Japan announced its first rate increase in 17 years, stating this in the monetary policy report (with our emphasis):
At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan assessed the virtuous cycle between wages and prices, and judged it came in sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner toward the end of the projection period of the January 2024 Outlook Report
In essence, mission accomplished! Sort of…
Some analysts have been sceptical about the overall direction of inflation in Japan, saying that price growth has been due to external factors, not lasting changes in Japan’s economy. Among these detractors are the Bank of Japan itself, which put in the report the following extremely hedged language (with our emphasis):
Concerning risks to the outlook, there are extremely high uncertainties surrounding Japan’s economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms’ wage- and price-setting behavior . Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices.
But throughout the report, the lead indicator cited by the BoJ as evidence of the virtuous cycle is a tighter labour market. Below, with a generous helping our emphasis once again:
Looking at the background conditions of wage developments, corporate profits have continued to improve and labor market conditions have been tight . In this situation, as indicated by the results of this year’s annual spring labor-management wage negotiations to date, it is highly likely that wages will continue to increase steadily this year, following the firm wage increase last year . Moreover, anecdotal information from firms -- which is gathered through the Bank’s Head Office and branches -- suggests that a wide range of firms have maintained their stance of raising wages …cost increases led by the past rise in import prices have waned, services prices have continued to increase moderately, partly due to the moderate wage increases seen thus far . As these recent data and anecdotal information have gradually shown that the virtuous cycle between wages and prices has become more solid, the Bank judged it came in sight that the price stability target would be achieved in a sustainable and stable manner toward the end of the projection period of the January 2024 Outlook Report
And that shows us how the ouroboros of Japanification could eventually, uh, return to be being a regular snake: a declining population will create an increasingly tight labour market, and help alleviate inflation.
The ageing population is both the cause of Japan’s disinflationary woes, and its potential saviour.
As the working age population shrinks, fewer working age adults will fight for fewer jobs, driving up wages, in turn driving up prices, in the delicate dance avoided or dampened by most central banks, but actively pursued by the BoJ.
Of course, this is all a question of relative scale, and the consensus among economists is that a shrinking population is overall deflationary, and inflation is just one of the many issues facing Japan’s economy.
There are also other massive unknowns, such as whether Japanese companies may be able to suppress wage pressures with productivity improvements (anyone heard of this thing called AI???), and whether Japan’s producers can continue to piggyback on a generally growing global economy despite its own long-term economic stagnation. But at the same time, the economic logic remains — fewer workers, higher wages.
If a low birth rate does not squash the green tendrils of Japan’s inflation comeback first, it may just save it.