Prices are rising in Japan, but wages are not

youmaibo has delighted the Japanese for decades. The cylindrical popcorn treat, whose name means “delicious stick,” comes in 15 flavors, from salami to spicy cod roe. The price is all the more attractive: the same ten yen ($0.08) since it hit the market in 1979. So when Yaokin Corporation, the company that makes Umaibo, raised its prices by two yen in January, it made national news. “We are witnessing a turning point in history,” tweeted Osawa Atsushi, a musician whose rock band sang over Umaibo’s “miracle prize” in a hit song in 2010.

“It’s not just Umaibo, all prices have gone up! shouts Ohtani Fumihito, the owner of a snack bar in Tokyo that sells the sticks alongside other inexpensive treats. Core consumer prices in Japan, which exclude fresh produce, rose 2.2% year-on-year in June. The July figures, which will be published on August 19, should maintain the trend. The Bank of Japan (bohI) now estimates that prices will rise 2.3% in the current fiscal year. It would be the first time prices have exceeded the bank’s 2% target since its introduction in 2013, excluding the impact of sales tax hikes. The covid-19 pandemic and the commodity shocks from the war in Ukraine appear to have done what years of accommodative monetary policy could not.

Inflation has been much more contained in Japan than elsewhere in the rich world. (It exceeded 9% in America and 10% in Great Britain.) As in other countries, it is stimulated by the rising cost of imports more than by the runaway demand. “We have the wrong kind of inflation,” says a Japanese man CEO. “It’s not the product of a healthy economy.” Excluding fresh produce and energy, prices only increased by 1% in June compared to the previous year. While other central banks in the rich world have raised rates to keep inflation under control, bohI kept them negative, hesitating to raise them until they were sure demand was strong enough to drive prices higher.

Several factors have kept prices in Japan relatively stable. First, the economy has not recovered from the pandemic as quickly as in other countries. Consumers have remained cautious much longer than elsewhere. While America gdp regained its pre-pandemic size in the second quarter of 2021, Japan only did so in the second quarter of this year. Decades of low inflation or outright deflation have also made companies more reluctant to pass on rising costs to consumers.

Above all, wages have not increased in parallel with prices. During this year shunto, the season of annual wage negotiations, large companies have granted their full-time employees only 2.3% increase, barely more than the 1.8% of last year. and well below the government’s 3% target. Unlike America and Britain, wage growth has not accelerated significantly, despite an unemployment rate of 2.6% in June. This is a big reason why the bohI expects inflation to fall below 2% in 2023 and 2024 as commodity prices decline.

Nonetheless, many policymakers and economists believe that Japan still has a chance to break free from decades of low or no inflation. The Japanese are beginning to expect higher prices. The bohIit is tankan The survey, which focuses on the economic situation, shows inflation expectations above 2% not only in the short term, but also in three years. Rising input costs are beginning to be reflected in retail prices for a wider range of products. June data showed price increases for more than 70% of items in the consumer price basket, the highest share on record. Optimists hope that if inflationary pressures persist into next spring shuntosalaries could also start to rise.

Yet many potential stumbling blocks remain. If America fell into recession, the yen would likely appreciate, creating new deflationary pressures. The government is already under pressure to mitigate the impact of rising prices. On August 15, Kishida Fumio, Japanese Prime Minister, ordered the authorities to draw up new fuel and food subsidy plans. And even when the pandemic-induced caution wears off, consumers unaccustomed to high inflation and receiving minimal wage increases may rein in spending, dampening demand. ■