Author: Masahiko Takeda, ANU
The Japanese economy in 2023 had two distinct features. Macroeconomic indicators such as GDP and employment were broadly sound. But unsustainable economic trends continued to worsen, raising concerns about Japan's future economic stability.
Japan's real GDP growth in 2023 is just over 1 percent — modest, but not bad given potential growth of less than 1 percent. The output gap – the difference between actual and potential output – closes, the unemployment rateIt has fallen during the Covid-19 crisis and the National Jobs-to-Apply Ratio is more than 1.
There is consumer price inflation Currently around 3 percent, well above the Bank of Japan's (BoJ) 2 percent target. Corporate profits are buoyant, stock prices have hit post-bubble highs and inbound tourism has rebounded to pre-Covid-19 levels, benefiting industries hit hard by the pandemic.
Despite these positives, most Japanese people are unhappy. The source of their dissatisfaction is that even though nominal wages are rising, the rate at which they are rising is slower than inflation. It has eroded real wages, Undermined and cast doubt on the continuation of moderate economic growth.
The wage-price gap has affected macroeconomic policy decisions. While the BoJ has taken several steps to somewhat loosen its yield curve controls, it has refrained from normalizing too loose a monetary policy. This conclusion is grounded in the absence of a virtuous cycle called wage and price inflation. In November 2023, the government introduced a financial package.Beats deflation completely'. The odd reference to 'deflation' reflects the idea that the economy is not immune to deflation until wages rise to meet or beat inflation.
Given the unsustainable trends in the economy, it is questionable whether these policies are appropriate. The Japanese yen exchange rate has weakened significantly since 2021, making already 'cheap Japan' even cheaper. and reduces US dollar-denominated GDP. Although it is difficult to determine the equilibrium exchange rate, it is clear The current exchange rate is out of line And a major revision is required. A weak yen effect Large interest rate differentials between Japan and other advanced economies. It is up to the BoJ to reduce exchange rate misalignment.
With consumer price inflation already well above its target, the BoJ has good reason to normalize policy. Although wages still lag behind, monetary policy is not a tool for raising 'real' wages, which are determined by real factors such as labor productivity and labor market conditions. Pursuing ultra-loose monetary policy due to slow wage growth is misguided, and by doing so the BoJ could bring about higher real wages.
The government's November 2023 policy package includes measures that can contribute to higher productivity. The third and fourth pillars of the package aim to stimulate domestic investment and digitization, consistent with sustainable real wage growth. These pillars align with the new form of capitalism that Japanese Prime Minister Fumio Kishida presented in June 2022.
However, the package focused more on Kishida's need to satisfy the public by providing quick relief from the impact of inflation. The first pillar includes the continuation of stop-gap fuel subsidies and income tax cuts. The second pillar consisted of various subsidies to encourage wage growth. These measures do little to improve the economy's supply-side efficiency, meaning that any relief that households and workers receive from the package will not last long.
No doubt Kishida's disappointment, the tax cut drew fire from all sides as temporary and untargeted. Most importantly, most of the package is designed to face Another unsustainable aspect of Japan's economy – High and rising public debt and deficits.
Japan's public debt-to-GDP ratio has been high for decades without causing any crisis. The BoJ has absorbed huge amounts of government bonds and bills, leaving little room for private investors to sell them. Although interest rates have risen somewhat, they are still below the nominal GDP growth rate, making credit dynamics adverse. In this environment, there is no need to worry about financial crisis.
The likelihood of a financial crisis depends on whether inflation is moderate. A manageable inflation will allow the BoJ to limit the extent of its policy normalization. Once the BoJ's support is lost, the government's cost of financing could rise significantly, creating a vicious cycle of debt. Wage hikes in the coming years, both the BoJ and the government expect, could be a counter-blessing in disguise. If they accelerate inflation, the BoJ will be forced to take stronger action, putting pressure on vulnerable public finances.
The BoJ has long characterized wage rises as 'virtuous'. They are indeed virtuous if improvements come from the supply side of the economy. If the Japanese people hope to derive some virtue from the BoJ's inaction or the government's lackluster action, they are likely to be disappointed.
Masahiko Takeda is a Senior Fellow at the Australia-Japan Research Center at the Australian National University's Crawford School of Public Policy.