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Japan could use more inflation

It is clear why the yen is diving: Japan wants more inflation, while most other developed countries have too much of it. Partly driven by rising energy prices, the country can finally reach its long intangible goal of the measure. Its real goal – wage growth – seems to be harder to achieve, but there is also a glimmer of hope there.

The Japanese yen has lost 13% against the dollar this year and has reached its lowest level in two decades. The decline picked up further last week when the Bank of Japan 8301 7.57%

reiterated its commitment to limit 10-year Japanese government bond yields to 0.25%, saying they would buy the bonds every weekday if necessary.

The continued easing in Japan and the tightening in the US mean a larger gap in bond yields between the two countries: The yield spread between their 10-year government bonds rose to 2.67%, the highest in three years.

The cause of the political divergence? While consumer prices in the US rose 8.5% from a year earlier in March, inflation in Japan is still below the central bank’s target of 2%. Japan’s core consumer price index, which excludes fresh foods but includes energy, rose 0.8% from a year earlier in March – the highest in more than two years. Rising energy prices are likely to drive it even higher, and a falling yen could exacerbate this as Japan imports most of its food and energy.

While Japan may finally reach its target, such cost-driven inflation – rather than demand-driven price increases – may not be what the central bank is looking for. Apart from energy and fresh food, the country is still experiencing deflation. It puts the government in a tough situation, especially with an election coming in a few months: A tightening too soon may risk stifling the green shoots of growth, but easing could drive consumer prices higher through an even weaker yen.

More aggressive fiscal policies may help mitigate the blow to consumers and transfer some money to households, but another key lies in the labor market. Japanese wages have been stagnant for nearly three decades and have lagged behind corporate profits. That may be set to change, according to CLSA strategist Nicholas Smith. He says a declining population along with jobs driven by reopening could force companies to compete for workers. The working-age population has been declining in Japan for decades, but more people have joined the workforce – especially women – to fill vacancies. About 91% of the working-age population was employed just before the pandemic hit, up from 78% in 2012, according to the CLSA.

Japan is likely to reach its inflation target soon. But even more important is whether it will finally be able to raise its wages.

As the price of groceries, clothing and electronics has risen in the United States, prices in Japan have remained low. WSJ’s Peter Landers goes shopping in Tokyo to explain why stable prices, even if they’re good for your wallet, can be a sign of a slow-growing economy. Photo: Richard B. Levine / Zuma Press; Kim Kyung Hoon / Reuters (video from 12/10/21)

Write to Jacky Wong at

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