What is Happening with the Bank of Japan?
Updated: Jun 2, 2022
The global economy has been put under pressure since COVID-19 began spreading over the world in 2020, with supply chain interruptions, challenges in the job market, and decreased tourism revenue. The pandemic is estimated to have driven around 97 million people into impoverishment, according to the World Bank. Global (2021) governments had to raise their expenditures in order to deal with increasing healthcare costs, and unemployment and also help businesses survive in those challenging circumstances. As a result, countries have taken on extra debt in order to finance these measures, resulting in the highest global debt levels seen in half a century.
The Japanese government is the world’s most indebted government, with an accumulated debt of around 190 percent of annual economic output. Taking this into account, Japan appears to have the worst type of inflation today (demand-pull inflation): higher-paid individuals go out and spend more, which raises demand and additional investment, and eventually, higher wages. Instead, increasing overseas costs will raise prices, causing customers to buy fewer goods.
However, the country’s economy is projected to recover, now that the impact of the pandemic COVID-19 and the supply-side constraints are fading. Moreover, there is an increase in external demand (exports and industrial production) which contributes to the rise of the economy. In contrast, commodity prices such as oil and natural gas are rapidly increasing due to the situation surrounding Ukraine.[1] Since most of these goods are imported, there is high pressure on the real income of consumers through rises in food prices and energy.
The Consumer Price Index is anticipated to increase to roughly 2% in May 2022 (from 1.2% in March), mainly to the impact of a major rise in energy prices. In this setting, the expectations for inflation have increased, leading to a further rise in household expenditures. Therefore, in Japan where prices have remained mostly unchanged for decades, inflation is gradually picking up. However, the Bank of Japan has decided to maintain the interest rates very low.
Moving forward, the consequences of more than two decades of deflation are visible. Japan remains prosperous and secure, but many Japanese citizens are unaware of the fact that the rest of the globe has become wealthier in absolute terms whereas their own country has mostly remained stagnant. The capital of Japan, Tokyo, used to be the most expensive city in the world. However, nowadays it no longer ranks among the top ten worldwide rankings, due to gradual tariff reduction and increased import substitution.
Source: Statista
The graph from the above illustrates the inflation rate in Japan between the years 1987-2020 with forecasts until the year of 2027. In 2020, the inflation rate was around -0.03 percent in comparison with the previous year. For the year of 2022, the inflation rate was projected to approximate 1 percent.
In the light of all the above, the course of COVID-19 and its impact on the global economies is still worth observing. Furthermore, there is significant uncertainty in regard to the situation surrounding Ukraine as well as the implications for commodity prices, capital markets, and international economies.
Edited and Reviewed by Deborah Ikomi
[1] Bank of Japan, ‘Outlook for Economic Activity Prices’, 2022.