According to the most recent report on consumer prices, published at the Statistics Bureau of Japan, consumer prices rose 3.4 percent, year over year, in May. That’s down slightly from April’s 12-month increase of 3.6 percent, and it’s up solidly from May 2024’s increase of 2.9 percent.

Overall, Japan’s CPI inflation has surged since mid 2022, bringing inflation rates up to multi-decade highs and to levels not seen since the early 1980s. (Japan’s core inflation measure has surged as well.)

Since the 1990s, Japan’s economy has often been regarded as far more prone to deflation than inflation as CPI growth has often hovered around zero percent. Thus, few anticipated many problems when, from 2016 to 2024, Japan’s central bank (BOJ) pursued negative-interest-rate policy, and held it’s policy rate at -0.1 percent for 97 months.

Much of the motivation behind this was standard Keynesian-style stimulus, but the Japanese state is also deeply in debt, and this means the BOJ must also intervene to help manage prices on Japanese sovereign debt. This helps keep Japanese debt yields low, and the BOJ has amassed an enormous stockpile of government debt. In fact, the Bank of Japan is the largest holder of Japanese government debt, and holds more than fifty percent of the total. 

As with the US’s central bank, the Japanese central bank buys up this debt to prevent yields from rising to unmanageable—unmanageable from the regime’s perspective—levels. The downside of all this, however, is that these enormous debt purchases often require new money creation, and thus leads to monetary inflation.

All this monetary inflation began to surface in a new and virulent way following years of aggressive covid-related spending. By mid 2022, consumer prices began to surge in Japan, rapidly rising from 0.1 percent in October 2021 to 3.8 percent in October 2022.

In a global context, this surge in consumer prices was relatively moderate, but in the context of Japanese prices, the increase was substantial. Moreover, Japanese CPI inflation has still not fallen significantly from its 2023 high, and is now tied with the UK’s CPI inflation rate at 3.4 percent. In contrast, the US CPI rate is 2.4 percent, and the euro area’s rate is 1.9 percent.

Of course, there are variations in how CPI is measured from place to place, but all of these central banks use the same “two-percent inflation target”—a completely arbitrary benchmark beloved by central bankers—and Japan’s CPI inflation remains well above that.

Moreover, thanks in part to its rising price inflation, Japanese wages have been sluggish. As reported by Reuters earlier this month, “Japanese real wages fell for a fourth consecutive month in April, eroded by stubborn inflation that has continued to outpace pay hikes delivered so far by companies…”

The Political Price of Price Inflation

Not surprisingly, price inflation has proven to be politically unpopular and this has forced the hand of the Bank of Japan which finally in April 2024 allowed its target policy interest rate to rise above zero to 0.1 percent. The BOJ allowed the rate to rise to 0.5 earlier this year, where it has remained.

Attempts to rein in inflation also led to the BOJ shrinking its enormous portfolio of Japanese government bonds. By 2025, the BOJ adopted a policy of reducing its portfolio by 200 billion yen ($2.7 billion) per quarter.

Naturally, with less activism from the central bank in buying up government debt, yields have risen to some of the highest levels seen in more than 15 years. For example, the 10-year bond rose to 1.4 percent. It had been 0.25 percent in early 2022. (The surge in the 40-year bond was even bigger.) As in the United States—which is also deeply in debt—rising yields impose larger debt obligations in terms of interest payments. The rising yields (i.e., falling prices) were further fueled by Japan’s worsening fiscal situation.

The Limits of Easy-Money Policy

Japan has long been regarded as largely immune from the problems of debt-driven fiscal policy and monetary inflation. After all, throughout most of the 1990s and the early 2000s, it seemed that rising debt, large deficits, and activist monetary policy simply didn’t lead to price inflation or sovereign debt problems. At least in Japan.

However, in more recent years, rising yields combined with rising price inflation has illustrated that inflationary monetary policy is indeed everywhere limited by political realities. Eventually, falling real wages and a falling standard of living will prove to be problematic for a regime. The political need to rein in inflation forces the central bank to rein in monetary inflation which then leads to rising yields. If yields are left to market pricing, debt service can spiral out of control eventually leading to a sovereign debt crisis. So, central banks again turn to forcing down interest rates—which again fuels monetary inflation. It’s a cycle that we now see at work in the United States and in Europe where central bankers simultaneously buy up government debt with new money while also hoping and praying that a longer term solution will present itself. 

Unfortunately, the only real long-term solution to this is genuine fiscal austerity and debt repudiation.