Tokyo A country swims against the tide: In Japan, combating inflation remains a matter for the government, not the central bank. Prime Minister Fumio Kishida announced a new 39 trillion yen (265 billion euro) economic stimulus package on Friday. The government intends to reduce inflation, which was three percent nationwide in October, by 1.2 percentage points.
In addition to investments in new technologies such as semiconductors and robots, Kishida promised to temporarily reduce electricity costs for private households by 20 percent through subsidies. Gas prices are also to be subsidized, just like oil prices are now. The Japanese are already paying almost a quarter less for gasoline than would be possible under market conditions.
In many other countries, it is the central banks that use drastic interest rate hikes to combat inflation through monetary policy. The European Central Bank raised interest rates by 0.75 percentage points to two percent on Thursday. This is due to the drama of the situation: In Germany alone, the inflation rate in October was already 10.4 percent, as the Federal Statistical Office announced on Friday.
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Very different from Japan. The central bank left the upper bound on 10-year Japanese government bonds (JGBs) at 0.25 percent after a two-day monetary policy meeting on Friday. This special monetary policy approach is fueling inflation, even if the values are significantly lower than in Europe and the USA: In the capital Tokyo, inflation was 3.5 percent this month. Nonetheless, this is a worrying number for Japan, as inflation has not been this high in 40 years.
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Inflation in Japan is fueled by a rapid fall in the yen. Since the beginning of the year, the currency has lost about a third of its value against the dollar and a tenth against the euro. Because investors in the foreign exchange market are currently being strongly influenced by the growing interest rate differential between Japan and the other major markets.
Japan’s prime minister is struggling to keep up with his dwindling popularity – and continues to drive up the debt.
(Photo: Reuters)
Last week, the dollar rose to almost 152 yen for the first time in over 30 years. As a result, Japan’s Ministry of Finance intervened in the currency market through the central bank for the second time in four weeks. However, analysts believe this will only halt the yen’s depreciation in the short term. Central bank chief Haruhiko Kuroda emphasized again on Friday: “We have no intention of raising interest rates in the near future.”
Reason for the monetary policy passivity: According to the Japanese central bank, the country has not yet reached the pre-pandemic level economically, in contrast to the USA and other countries. In addition, demand is not yet strong enough to have an inflationary effect. Instead, rising costs are driving prices, as the nine members of the Monetary Policy Committee showed in their quarterly economic report.
Energy subsidies dampen the price increase
They raised their inflation forecast for the financial year that has been running since April 2022 from 2.3 to 2.9 percent and thus missed the inflation target of two percent. For the next two years, however, the monetary politicians expect a decline in price increases to 1.6 percent each year due to government energy subsidies. At the same time, the economy is clearly losing momentum. For the current financial year, the monetary policy committee lowered the growth forecast from 2.4 to 2 percent, for 2023 from 2 to 1.9 percent.
In the capital, inflation recently rose to 3.5 percent. After decades of price stability, this comes as a shock to the Japanese.
(Photo: mauritius images / robertharding)
Stefan Angrick, economist at Moody’s Analytics, predicts a certain continuity. He is convinced that the central bank’s low interest rate policy will continue even after Kuroda’s term in office ends in April 2023. “Ultimately, the facts, particularly the lack of robust wage growth, will not change even under a new central bank governor.”
Rising prices, falling popularity: Kishida acts
With the central bank remaining largely passive, politicians, namely Kishida, continue to come under pressure. Its declining popularity ratings are notable. For one thing, many Japanese resent his Liberal Democratic Party’s close ties to the Moon sect. On the other hand, people blame him for the unusual price jumps.
Because after more than 20 years of deflation, even moderately rising prices in Japan are having a real shock effect. Against this background, it is understandable why the head of government is now launching the second major economic stimulus package in his 13-month term of office: he wants to stop his decline in popularity.
A massive economic stimulus package is intended to curb rising energy and food prices.
(Photo: Reuters)
The government initially considered providing relief only to low-income families, but is now extending the benefits to the entire population. The electricity price subsidies alone could amount to an average of 45,000 yen (306 euros) per household in the coming year.
Including spending from central and local governments and public and private companies, the program amounts to 71.6 trillion yen ($500 billion). But only 260 billion should come from the state coffers.
Economists have no doubts that the subsidies will unfold their inflation-lowering power. However, political scientist Harukata Takenaka from the National Graduate Institute for Policy Studies warns: “This is populist politics.” There is a risk that the subsidies will remain permanent and thus drive up the already high deficit even further. Japan has a debt mountain of 235 percent of the gross domestic product – in Germany it is only 70 percent.
More: Japan intervenes in FX market – Yen halts its slide