On April 4, 2013, a panel emphasizing the number '2' in red appeared at a press conference held by the Bank of Japan (BOJ) in Tokyo. Haruhiko Kuroda, then the BOJ governor, used these three numbers to explain a new policy after his first monetary policy meeting. The plan aimed to double the amount of money supplied by the BOJ and achieve a 2% increase in consumer prices within about two years. Kuroda confidently stated, "This is a completely different level of monetary easing in terms of both quantity and quality." Thus began the BOJ's 'quantitative and qualitative easing' policy, which involved massive purchases of government bonds to inject money into the economy.
Fast forward 13 years to October 30, 2026, when current BOJ Governor Kazuo Ueda announced that the 'core inflation rate,' excluding temporary fluctuations, had generally reached the 2% target. This marks a significant milestone, as the goal set for two years has nearly been achieved after 13 years. However, a question arises: why did the BOJ initially seek to raise prices? In South Korea, there are concerns about rising prices, but there is no effort to deliberately increase them. Isn't it better when prices remain stable?
One scene illustrates what Japan has been like. In April 2016, the president of Akagi Nyugyo, the maker of the popular ice candy 'Garigari-kun,' along with about 100 employees, appeared in a TV advertisement to bow in apology. They raised the price of Garigari-kun from 60 yen (about 630 won at the time) to 70 yen (about 735 won), apologizing for the 10 yen increase, which was roughly 100 won. In Japan, it was customary to apologize for even a small price increase.
Since the late 1990s, Japan has experienced nearly 30 years of stagnant prices, and at one point, it faced deflation amid economic stagnation. Companies hesitant to raise prices were also reluctant to increase employee wages, leading households with stagnant incomes to be cautious with spending. As consumer spending declined, businesses were unable to raise prices. The BOJ's 2% target aimed to reverse this cycle. The idea was that if prices gradually increased, companies could raise prices and, in turn, increase wages.
However, breaking this vicious cycle proved difficult. Prices seemed to rise at times, but a consumption tax hike in 2014 dampened spending, and falling international oil prices curtailed the upward trend. Ueda acknowledged that while there was some effect from the quantitative easing, it did not produce the strong results needed to achieve the 2% target within two years.
The actual push for rising prices came from external shocks. As the economy began to recover post-COVID-19, the Russian invasion of Ukraine in 2022 caused oil prices to soar, pushing inflation rates above 2%. Additionally, with a labor shortage, companies began raising wages, and the wage increase rate during spring labor negotiations reached over 5% for three consecutive years.
The long-awaited inflation finally arrived. Tsutomu Watanabe, an emeritus professor at the University of Tokyo, noted that the mere establishment of the 2% target by former BOJ Governor Kuroda held significance. The 2% figure became ingrained in society, influencing Japan's largest labor union, Rengo, to use the BOJ's inflation target as a benchmark for wage increase goals.
With the target now within reach after 13 years, one might expect celebrations. However, the mood at the BOJ is quite different. During a press conference on October 30, Ueda stated that it is not yet time to declare victory. He emphasized that reaching 2% once is different from maintaining it consistently.
The BOJ, which once struggled with stagnant prices, now finds itself concerned that inflation may rise too quickly, exceeding the 2% mark. In fact, since ending quantitative easing in March 2024, the BOJ has raised interest rates every six months, with the policy rate reaching 1.25% in September. The central bank, which previously aimed to boost prices, is now focused on curbing inflation through rate hikes.
Declaring an official end to deflation falls to the government, not the BOJ. The government's criteria differ slightly from those of the BOJ. The Japanese government defines the end of deflation as a situation where prices are no longer consistently falling, with no expectation of returning to such a scenario. This means assessing whether the likelihood of prices falling again has significantly decreased.
To make this determination, the government primarily examines four indicators: consumer prices, the GDP deflator, the GDP gap (which shows whether demand exceeds supply capacity), and unit labor costs, which represent the labor cost per unit of production. Currently, all four indicators are positive. However, Minister of Economic and Fiscal Policy, Minoru Kihara, stated on October 30 that it is necessary to carefully monitor whether the GDP gap will remain positive in the future, indicating a cautious stance.
According to the Nihon Keizai Shimbun, a Cabinet Office official mentioned that based on the indicators alone, the government could declare an end to deflation at any time. Nevertheless, the government is delaying the announcement due to public sentiment. The question of whether rising prices are actually beneficial resonates deeply with Japanese households.
The 2% inflation rate has long been a goal for both the government and the BOJ. However, while wages have increased, they have not kept pace with rising prices, resulting in households being able to purchase fewer items with the same amount of money. In this context, if the government were to declare that 'deflation is over,' it could be perceived by the public as celebrating rising prices as an achievement. The Japanese government considered declaring an end to deflation in 2024 but ultimately decided against it due to concerns that such a declaration would lead to public dissatisfaction amid rising prices.
Consequently, the government's focus has shifted from declaring an end to deflation to assisting households burdened by rising costs. The Diet is currently reviewing legislation to lower the consumption tax, and the government has also decided on subsidies for electricity and gas bills during the winter. During the deflationary period, both the government and the BOJ worked together to inject money into the economy to achieve the same goal of raising prices. Now, the government aims to reduce taxes and fees that households pay, while the BOJ is raising interest rates to prevent further price increases.
Tax cuts and subsidies alleviate household expenses but also leave families with more disposable income. This could weaken the effectiveness of the BOJ's policies aimed at curbing inflation through interest rate hikes. Ryutaro Kono, chief economist at BNP Paribas Securities, pointed out that "in a situation far from fiscal consolidation, monetary policy alone cannot suppress rising prices."
Thirteen years ago, Kuroda promised to raise the inflation rate to 2% with the red '2' prominently displayed. In a country where prices had long remained stagnant, that promise signaled a desire to revive a stalled economy. Now, 13 years later, the BOJ has finally approached that goal. However, in front of households burdened with rising costs, it is difficult to present this outcome as a 'success.' This is why the Japanese government hesitates to utter the words 'end of deflation.'
* This article has been translated by AI.
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