Picture: Thomas Peter/ANA files – Bank of Japan (BOJ) Governor Haruhiko Kuroda, who is expected to step down in April, 2023, has set a 2 percent inflation target and continued ultraloose monetary easing.
Editorial – The Yomiuri Shimbun
The Japanese economy has entered a new year facing a new challenge of high prices. This will be a year in which the government will be tested as to whether it can implement policies adequately reflecting the changing economic environment, while companies will be tested as to whether they can change their mind-set.
Japan has suffered from deflation. Over the past 10 years, the rate of annual increases in the consumer price index, excluding perishables, has averaged less than 0.5 percent.
In November 2022, however, the index rose 3.7 percent from a year earlier, the highest rate since December 1981, when the effects of the second oil crisis lingered.
The corporate goods price index, a measure of transaction prices between companies, rose 9.3 percent in November year-on-year. This indicates a sharp rise in raw material prices, and upward pressure on prices remains strong.
It is necessary to note that structural changes in the global economy are behind these developments.
The global economy has developed through an international division of labour that takes advantage of areas of strength and helps nations complement each other. A typical example is China, where labour costs are low, growing as “the world’s factory”. Japan also relies on imports for resources and many other products. As the premise, free trade makes this possible.
However, the free trade system has been shaken by the growing tension between the United States (US) and China. Russia’s invasion of Ukraine has exacerbated the situation. With the disruption of supply chains, the current situation has been nearing a stage in which it will no longer be possible to buy cheap goods from anywhere in the world. The impact is highly likely to be prolonged.
Unless people’s incomes rise amid soaring prices, consumption could fall and the economy, still on a recovery track from the coronavirus pandemic, could slow down. Wage increases are essential to prevent such a situation.
The shunto spring labour wage negotiations are the focal point. The Japanese Trade Union Confederation, known as Rengo, intends to seek a pay hike of around 5 percent, including an around 3 percent pay scale increase to raise the level of base pay for employees across the board. Pay scale is used to determine employees’ bonuses and retirement allowances, making it easier for them to feel the effects of higher wages. Pay scale increases that match rising prices should be implemented.
Due to slower wage growth than in foreign countries, Japan’s average wage is at the lowest level among major developed countries. This may be partly due to a strong lockstep mentality among companies, reflected in the tendency that even when companies perform well, they hold down wage increases in consideration of other companies that are struggling financially.
Companies that are doing well should take the initiative in raising wages and lead the overall movement for wage hikes.
The government has long offered tax breaks and other favourable measures to companies that raised wages, but it is hard to say this has produced tangible results. Some say loss-making companies or corporations with less earning capabilities have limited opportunities to make use of such preferential treatment.
The government needs to scrutinise the needs of companies and take measures that can benefit a wide range of businesses.
Japanese companies have stockpiled their internal reserves, the accumulation of their profits, to more than 500 trillion yen, an increase of more than 200 trillion yen over the past 10 years. This may be a result of companies refraining from implementing wage hikes and capital investment partly due to the uncertainty of the future.
The business environment is also drastically changing amid progress in decarbonisation and digitisation. Now is the time to ensure growth with aggressive investment.
The direction of the Bank of Japan’s monetary policy will also be a major focus this year.
Bank of Japan Governor Haruhiko Kuroda is expected to step down in April. Kuroda has set a 2 percent inflation target and continued ultraloose monetary easing. Initially, the central bank let the yen fall in value on foreign exchange markets, boosting corporate earnings and stock prices.
However, the prolonged monetary easing has led to noticeable side effects, such as a decline in banks’ earning power due to ultralow interest rates. In recent years, the Bank of Japan has been criticized for pushing excessive depreciation of the yen and accelerating higher prices, due to a widening interest rate gap between Japan and the United States as the Bank of Japan maintained its monetary easing in contrast with US interest rate hikes.
Nevertheless, Kuroda has refused to review the BOJ’s monetary easing, but in December last year he abruptly changed his policy by widening the fluctuation range of long-term interest rates. This was perceived as an effective interest rate hike.
There is widespread speculation in the market that monetary easing will be reversed. The change of the governor could very well spur more debates for policy revision. It is hoped that the new governor will examine the effects and side effects of the monetary easing measures and flexibly manage policy.
The deterioration of Japan’s fiscal condition is serious. The total amount of general account spending under the budget for fiscal 2023 exceeded 110 trillion yen for the first time as an initial budget plan. This greatly surpasses the expected tax revenue of about 69 trillion yen, and it has become the norm to rely on the issuance of government bonds for more than 30 percent of expenditures.
The nation’s long-term debt balance has exceeded 1 quadrillion yen. Debts are nothing but a burden that will pass on to future generations.
In addition to spending on defence and social security, significant expenditures are needed for decarbonisation and measures to combat the low birthrate. It is time to thoroughly identify wasteful projects and rebuild the spending structure. It is necessary to strengthen the Diet’s ability to check budgets.
There are concerns that higher interest rates resulting from the central bank’s policy revision could increase the amount of funds to be used as interest payments on government bonds in the future. There is an urgent need to start a debate involving the public on how to tackle fiscal reconstruction.
This article was published in Japan News/The Washington Post