Japan Wakes Up: Is the Return of Inflation a Blessing or a Curse?
Decades of Chronic Stagnation
For decades, Japan suffered from “chronic stagnation” and “deadly inflation” where stagnant prices held back consumption and investment. The government and central bank used ultra-loose fiscal and monetary policies to stimulate the economy, to no avail. Central banks bought government bonds in massive quantities, and interest rates remained near zero or negative, but businesses and households remained reluctant to spend. The result: government debt exceeding 260% of GDP and an economy trapped in a vicious cycle of stagnation.
The Sudden Shift
However, the picture is now changing, as the Japanese economy is experiencing a significant return of inflation for the first time in three decades. Prices are rising, wages are moving, and the yen is falling to its lowest level against the dollar since 1990. Economic analysis raises a crucial question: Is this a sign of a final recovery or the beginning of a new economic problem?
Negative Interest Rates and a Weak Yen
The immediate cause of the yen's weakness is the large interest rate differential. While the US Federal Reserve rapidly raised interest rates to levels exceeding 5%, the Bank of Japan maintained near-negative rates for a longer period. This disparity made investing in the yen less attractive to global investors seeking higher returns elsewhere, leading to a sell-off of the yen and a purchase of the dollar.
A weak yen has a dual effect. On the one hand, it boosts exports for Japanese giants like Toyota, Sony, and Panasonic, as their products become cheaper in global markets. These companies' dollar earnings are converted into more yen upon repatriation, improving profit margins. On the other hand, a weak yen increases the cost of imports, particularly energy and food, putting pressure on Japanese households that rely on imported raw materials.
The New Governor’s Task
Kazuo Ueda, the new governor of the Bank of Japan, faces a complex task. The challenge is to “ventilate” the economy—that is, to exit extraordinary monetary policies without causing a shock. Any sharp rise in interest rates could weaken the already struggling real estate sector and increase the cost of servicing the massive government debt. While maintaining current policies could lead to uncontrolled inflation and erode citizens' purchasing power.
Wage Spring
A positive factor noted by analysts is "Shunto" Japan's annual wage negotiation season. After years of wage stagnation, labor unions and major companies have reached agreements for historic salary increases exceeding 3% in 2024 and 2025. This is crucial for creating a healthy positive cycle of wages and prices, allowing households to cope with inflation and boosting consumption, thus supporting real growth.
Tourism and Services
In the tourism sector, the weak yen has made Japan an extremely attractive destination for Europeans and Americans. Visitor numbers have surpassed pre-pandemic levels, with higher per capita spending. This recovery is helping the balance of payments, providing hard currency for exporting companies, and reviving the long-suffering hospitality and service sectors.
A Crossroads
Japan stands at a critical economic crossroads. Emerging from the era of deflation requires careful and courageous monetary leadership. Success will mean a more dynamic and resilient economy, with the capacity for sustainable growth and innovation. Failure could plunge the country into unsustainable debt, crippling inflation, and a renewed, more severe recession.
The world's eyes are on the Bank of Japan to see how this race against inflation will end. Japan is not just a major economy; it's a living laboratory for unprecedented monetary policies, and the results of its experiment will either inspire or warn other economies for decades to come.
