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NYTimes
New York Times
29 Jul 2024
River Akira Davis


NextImg:Japan Wanted Higher Inflation. It’s Here, and It Hurts.

As the rest of the world fought to keep inflation in check, one country welcomed it with open arms.

In the past few years, Japan saw a burst of inflation, spurred by pandemic supply chain snags and geopolitical shocks, as a way to shake the economy out of a decades-long cycle of weak growth and pressure from deflation. So while major central banks like the U.S. Federal Reserve raised interest rates to rein in prices, the Bank of Japan kept rates low as inflation accelerated.

The theory was that by sticking with rock-bottom rates, the central bank could harness the temporary spike in prices to foster the kind of inflation it had long sought: moderate, steady and supporting economic growth.

Businesses could cite their rising costs to justify price increases, leading to higher revenues that went toward higher wages for workers. With more money in their pockets, consumers could spend more, creating a positive economic cycle.

There have been some promising signs: Big Japanese firms like Toyota have reported large profits and pledged the biggest wage increases for workers in decades. In March, the Bank of Japan raised its policy rate for the first time in 17 years, concluding that the economy had achieved the “virtuous cycle” between wages and prices it had envisioned.

Ahead of a Bank of Japan meeting this week, there are a growing number of signs that everything is not going to plan.

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Japan’s economy has shrunk in two of the past three quarters, losing its spot as the world’s third largest to Germany’s.Credit...Shoko Takayasu for The New York Times

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