In several ways, Japan’s economy appears to be back in time.
Inflation and wage growth are largely where they were in the early 1990s, just before the price deflation and economic stagnation that came to be known as “thelost decade. “
That prompted the Bank of Japan to raise interest rates by a quarter point on Friday, to 0.5 percent, another step in its pivot away from the ultralow rates officials have long sought to revive the economy.
Friday’s increase, which brought their rate to the highest level 2008, Third in just under a year, Japan did not see the momentum of policy power 1989. After the rate hike march And July Last year, the Bank of Japan remained tight-lipped in recent policy meetings as it waited to see if President Trump’s inauguration would spill over into markets.
As other major central banks move to reduce the high interest rates they used to curb inflation, Japan is, as usualBuck the trend. After encouraging a period of rising prices, the Bank of Japan is now raising rates just above zero.
Economists say that with inflation returning and positive interest rates, Japan is beginning to resemble a more conventional economy.
Avoiding a deflationary mind-set—why buy something when it’s cheaper tomorrow—can help spur spending and investment. Raising interest rates usually cools the economy by making it more expensive to borrow, but economists suggest that tightening monetary policy in the case of Japan could help in the long run. Higher rates could keep “zombie” firms from taking cheap debt for years and make room for more growth-focused businesses that are better positioned to take advantage of Japan’s limited labor supply.
“There were a lot of areas of inefficiency and that opens up a world with inflation,” said Ayako Fujita, chief economist at JPMorgan Securities Japan. Raising interest rates was in some ways like “opening Pandora’s box,” he said, “but ultimately we believe that Japan will have new, more productive economic growth.”
For now, though, it’s not just inflation, base pay and share price which dates back to the early 1990s. Japan is reeling from an overall economy that has grown very little over the past three decades. In 2024, Japan’s gross domestic product adjusted for inflation is expected to grow by about a quarter from 1994, while in the United States, the economy is more than twice the size of the same period.
In Japan, inflation began to cool after the collapse of several real estate and stock market bubbles in the early 1990s. By the late 1990s, Japan was in full-blown deflation, a widespread and sustained decline in the general price of goods and services, leading to major investment and purchase delays.
To try to pull Japan out of this cycle of prices, wages and spending, the Bank of Japan began buying more government bonds and corporate debt—flooding markets with money that officials hoped would be spent or lent. In 1999, the central bank adopted a Zero-interest-rate policyAnd in 2016, it went a step further by implementing it Negative interest rates. Even these unorthodox strategies did little to stimulate economic activity.
Over the past few years, as pandemic supply chain and geopolitical shocks have pushed up prices around the world, Japanese officials have seized the opportunity to turn improved import spending into lingering inflation.
Japan remained steadfastly committed to its ultralow rates, rather than raising rates to raise prices, as did the Federal Reserve and virtually every major central bank in the world. Officials encouraged companies to pass on higher import prices and raise workers’ wages, hoping to generate an upward spiral of rising wages and inflation.
The cycle seems to kick into gear. As of last month, inflation in Japan remained above the Bank of Japan’s 2 percent target for 33 consecutive months, with core consumer prices rising 3 percent in December. In recent months base pay has accelerated to new highs of the 1990s. During spring labor talks last year, Japan’s largest business group, known as Shanto, agreed to the biggest wage increase since 1991.
As inflation eventually embeds itself in the economy, “higher prices spread beyond imports to domestic industries,” the Societe Generale wrote in a recent report. “For more than two years, Japan appears to have reversed three decades of isolation,” declared the Bank of France.
Still, a big concern is whether Japan’s economic recovery will be able to help the country move away from its prolonged period of stagnant economic growth. As Japan’s population shrinks, productivity lags and households face higher prices, it’s still unclear whether wages are rising enough to support spending.
As inflation has outpaced wage growth for the past three years, spending in Japan has remained relatively weak. Basar Prolonged slump This extends over the previous four quarters.
An estimate of the International Monetary Fund Report This month, Japan’s economy shrank by 0.2 percent in 2024. It forecasts 1.1 percent growth for the country this year – in line with the 1 percent growth forecast for Europe, but lower than the 2.7 percent growth expected in the United States.
While this year’s spring labor talks are likely to repeat the record wage gains of previous years, recent data suggest that growth led by Japan’s largest firms “will not translate into economywide wage improvements in the past,” said Stefan Angric, head of Japan economics analysis at Moody’s.
“There is a lack of wage growth,” Mr. Angrick said. And that, combined with sticky inflation, “suggests that household budgets will also be squeezed in early 2025,” he added.
