Population dynamics in action: Japan’s inconvenient truth

Abenomics was launched in late 2012 by Japanese Prime Minister Shinzo Abe and trumpeted a 2% per annum increase in consumer prices within 2 years. But the rate of increase in the Consumer Price Index (CPI) has been near 0% per annum over the past 12 months. Even excluding food and energy prices, the rate is currently only 0.5% per annum, while the growth in real GDP has averaged just 0.5% year-on-year for the past two years. In addition, export volumes have risen by less than 5% from their levels in 2012, despite the benefit of significant currency depreciation.

It seems to us that deflation is not, in itself, ‘the problem’, but rather a direct symptom of structural and societal factors affecting not just Japan, but most developed economies.  Japan’s demographic challenges are, however, particularly acute. It is hardly surprising that an economy that is seeing contraction in not just the working population, but also in the total population, is struggling to grow. This, allied with widespread domestic overcapacity (not to mention a global lack of pricing power), goes a long way to explaining why mild deflation has been an issue in Japan for two decades or so. Moreover, with relatively stagnant wage growth, some deflation in households’ costs has kept real incomes positive (in stark contrast to the US).

Abenomics, as originally conceived, may have been a reasonable idea: implement painful structural reforms, and offset the discomfort with loose fiscal and monetary policy. The problem is that, in practice, little structural reform has been achieved; monetary policy, via the Bank of Japan (BoJ), has been the main lever.

Iain Stewart – Newton, a BNY Mellon company

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