What makes Japan’s economy the odd man out?
While nearly every other country in the world struggled with inflation over the past few years, there’s been one country where prices have only budged a little — Japan. The country has seen prices rise only slightly coming out of the pandemic and interest rates didn’t just stay low, they’re low to the point where they’re actually negative.
Mireya Solis is the director of the Center for East Asia Policy Studies at the Brookings Institution and the author of “Japan’s Quiet Leadership: Reshaping the Indo-Pacific.” She joined Sabri Ben-Achour to talk about the unique situation Japan’s economy is in. An edited transcript of their conversation is below.
Sabri Ben-Achour: You know, for as much as we have been traumatized by inflation here in the U.S., it’s kind of barely a blip in Japan. What about Japan’s economy is different?
Mireya Solís: Japan has experienced in the past few years a long spell of deflation. So, you know, inflation in Japan today is a little bit over 2%. It doesn’t feel very high given what we’re going through here in the United States. But for Japan, this is actually a very big change and the people are feeling it in their wallets and they’re not happy about it.
Ben-Achour: So normally when an economy has inflation, that is higher than it would like, it would raise interest rates. But Japan has negative interest rates. Why is that? And do you see that changing anytime soon?
Solís: For a very long time, the government has been trying to stimulate the economy and it hit a point where you had zero interest rates and you were not achieving the stimulus that was desired. And that’s when they went creative and they started applying negative interest rates. I think the reading from the Bank of Japan, is that at least till this point, what Japan has experienced is not the right kind of inflation. It has not been fueled by positive change in the economy. And the argument that we hear from the Governor of the Bank of Japan is that they want to wait until they see a positive cycle where inflation is driven by an increase in wages. Just a couple of days ago, Mr. Ueda, the governor of the Bank of Japan, began to hint that he’s finally seeing these conditions align. I think we’re beginning to see the beginning of change but that they’re proceeding very cautiously.
Ben-Achour: Despite this controversy, there does appear to be some amount of optimism around Japan’s economy. The Nikkei hit 34 year highs recently. Where do you see Japan’s economy headed?
Solís: You know, it’s very interesting when you think about the Nikkei Stock index finally reaching levels that we had not seen in the last 30 years. Part of it has to do with the fact that Japan is pursuing some corporate governance reforms and that encourages investors. Japanese companies in some areas are extremely competitive. The problem with Japan is that it has what we refer to as a dual economy. So you have these areas of strength, but you also have a lot of sectors where productivity is low. I think guarded optimism is a good way to think about where Japan is today.
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