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For years, Japan’s central bank has kept interest rates low—currently -0.1 percent—to spur the domestic economy and keep the yen weak to make Japanese goods cheaper abroad.
Whatever benefits that strategy brought in the past, it is failing now.
Despite massive government stimulus, the economy has remained weak and worker pay has stagnated.
While U.S. worker pay has risen more than 4 percent in the past 12 months, Japan’s wages and salaries have remained largely unchanged.
Now the yen has plunged to a two-year low against the dollar, rattling the business economy, a slide we documented in “Japan Raises Inflation Forecast, Yen’s Value Falls” (25 Jan 2022).
Also, inflation is starting to tick up in a country that imports most of its food and virtually all of its petroleum fuels—not because of stronger consumer demand but because prices are rising around the world amid supply-chain chaos and global shortages of both essential and discretionary goods.
Seeing inflation for the first time in years, worsened by the weak yen’s shrinking purchasing power, Japanese consumers are now cutting back on spending, dealing another blow to the country’s already-feeble economy.
“The yen depreciation is attacking the weakest point of the economy,” economist Takahide Kiuchi at the Nomura Research Institute told The Wall Street Journal.
Consumers “are facing an increase in prices of every imported good,” he said. “The situation is undermining consumer sentiment even in advance of actual inflation.”
The weak yen was a blessing when Japan was the manufacturing colossus that China is now.
Then globalization led Japan’s companies to make their products offshore where labor was cheaper, which rendered the yen’s weakness largely moot.
Now importers have to convert more yen to dollars to pay their bills, as the dollar remains the chief currency of international trade and the currency in which oil is bought and sold.
Also, the Bank of Japan has insisted on keeping its interest rate unchanged, even as the U.S. and other countries around the world are raising their interest rates, as we reported in “Japan’s Yen Continues Its Tailspin as Inflation Accelerates” (26 Apr 2022).
As a result, investors are choosing currencies other than the yen as more lucrative places to store value.
The widening spread between U.S. and Japanese interest rates is accelerating the conversion from yen to dollars, the WSJ noted.
However, the central bank is leery of raising interest rates, both for fear of further weakening the economy and of raising the cost of the national debt, which now stands at 250 percent of GDP.
The GDP has skyrocketed as Japan has come to rely on government stimulus to juice consumer spending.
Last month, the country’s parliament agreed to fund another package of subsidies and cash payments to households, this one worth about $380 to every family with children.
TREND FORECAST: Japan’s economy likely shrank 1.8 percent in this year’s first quarter, according to a Reuters poll of economists.
A contracting economy with rising prices is the hallmark of Dragflation, our Top 2022 Trend that already has shown itself in China in April (see related story in this issue) and elsewhere.
Therefore, should the Ukraine War persist and as a result numerous commodity prices continue to rise, the trend-line is pointing to a period of global Dragflation before 2023.