Revitalizing Japan’s Economy: Can Virtuous Cycle Be Achieved to Overcome High Prices? / BOJ Must Manage Monetary Policy Appropriately

The new year has begun, in which Japan will reach a critical point as to whether the nation’s economy can completely overcome deflation and achieve a virtuous cycle toward growth. It is time for both the government and the business community to renew their determination to implement reform.

There has been a clear shift in domestic price trends. The consumer price index, excluding perishable items, rose 2.5% in November 2023 from a year earlier for the 27th consecutive month of increase. The public’s concern about high prices is growing.

Corporate responsibility to raise wages

Initially, price hikes were mainly driven by soaring import prices due to higher energy costs and the yen’s depreciation. Recently, however, the upward trend has also spread to service prices amid labor shortages.

Of course, higher prices hurt the public. But isn’t it possible to turn this hardship into an opportunity?

The Japanese economy after the collapse of the bubble economy has been called “the lost 30 years.”

With prices not rising, companies were unable to increase sales, and they tried to secure profits by thoroughly cutting costs. This naturally suppressed wages. Japan’s average wages have sunk to the lowest level among major industrialized countries.

Japan has had a difficult time breaking out of a vicious cycle in which wages do not increase, so consumers try to be thriftier, which further lowers prices.

With high prices spreading from overseas, companies have finally begun to recognize the importance of raising wages. According to the Japanese Trade Union Confederation (Rengo), the average wage increase rate in last year’s shunto spring labor wage negotiations was 3.58%, the highest level in 30 years.

However, if price increases are taken into account, this figure is still not sufficient. Real wages, excluding the effect of prices, marked their 19th consecutive month of decline on a year-on-year basis through October 2023. It is essential to boost real wages to a level that leads to positive growth.

In the fiscal year ending March 2024, the combined final profits of major listed companies are expected to reach a record high. The environment is ripe for wage increases.

It is necessary to break the vicious cycle by implementing wage increases to overcome high prices, and make this effort the starting point for creating a virtuous cycle. Companies can be said to have a responsibility to raise wages for that purpose.

A number of major companies have announced wage increases of around 7% for this year’s shunto negotiations. It is important to spread this trend to small and midsize enterprises, which account for 70% of the nation’s employment.

When large companies do business with small and midsize firms, they must allow smaller enterprises to pass on increased labor costs to transaction prices. The industrial world as a whole must change its mindset from one that has been focused solely on cost cutting.

The lack of widespread public sympathy for the government’s measures to realize a virtuous circle is worrying.

Prime Minister Fumio Kishida intends to implement fixed-amount cuts for taxes, including the income tax, in June. However, his explanations of the significance and effects of the measures have changed several times, and public opinion surveys have shown notable opposition to the tax cuts.

Sympathy for govt steps not spreading

Measures to support continuous wage increases are more important than temporary steps for tax cuts.

To prevent companies from further hoarding profits as internal reserves, the government needs to strengthen policies that will encourage companies toward reform, through such measures as reducing taxes on companies that are willing to raise wages and make capital investments. It should also increase the tax burden on businesses that are reluctant to do so.

The monetary policy of the Bank of Japan, which has maintained massive monetary easing measures, is also reaching a turning point.

BOJ Gov. Kazuo Ueda has revised the central bank’s policy to allow greater fluctuation in long-term interest rates, which has been suppressed through massive purchases of government bonds. The market is increasingly expecting the central bank to decide this spring at the earliest to lift its negative interest rate policy, which would mark a shift in its monetary easing policy.

Ueda has so far continued the monetary easing measures on the grounds that stable price increases accompanied by higher wages have not yet been achieved. The outcome of this year’s shunto negotiations could be a factor in the BOJ’s decision on whether to change its policy.

The fundamental state of economies is a world in which there are interest rates. Lifting the negative interest rate policy is an inevitable course on the assumption of overcoming deflation.

However, the negative impact on the economy will not be small, because this will lead to higher mortgage rates and lending rates for businesses. It is hoped that the BOJ will carefully assess consumption and other economic trends, as well as prices and wages, to make appropriate decisions.

Move swiftly on fiscal reconstruction

Any change in the BOJ’s policy will also affect the country’s fiscal management. The reason why is that higher interest rates would mean a greater burden of interest payments for the government, which continues to issue huge amounts of government bonds.

With the rise in long-term interest rates, the amount of funds to be used mainly as interest payments on government bonds has already hit a record high in the initial budget plan for fiscal 2024. If the negative interest rate policy is lifted, the interest rates are likely to rise further.

The outstanding balance of national debt has exceeded ¥1.2 quadrillion, more than double the gross domestic product, and it is at the worst level among developed countries. The government should be aware that presenting a road map for fiscal restructuring and mitigating the public’s fears about the future are also essential tasks for economic revitalization.

(From The Yomiuri Shimbun, Jan. 9, 2024)