Japan’s unique response to inflation: do nothing



Despite a plummeting yen, the country is holding firm on low interest rates

by Philip Patrick

Credit: Getty


About 10 years ago I interviewed the man known as the world’s greatest shoemaker at his atelier in central Tokyo. I learned that Yohei Fukuda spent around 100 hours on each pair of his exquisitely crafted bespoke offerings. And yet, as he only charged around half of what you would pay on Saville Row or Jermyn Street, he made very little profit. I asked him why he didn’t raise his prices, but he said that he simply couldn’t:

It would upset the customers. You see, in Japan, we believe we are working not for ourselves, but for the country. We mustn’t upset the customers. The customer is God.

– Yohei Fukuda

This encounter came back to me as I followed the saga of Japan’s seemingly ossified interest rates and plummeting yen. Despite a worldwide trend in central bank increases to meet the challenge of surging inflation, Japan is an outlier. The BOJ is now, since the Swiss moved, the last dovish major central bank in the world. The question is: why?

Firstly, rising prices are taboo in Japan. Any price increase is a shock to the system. Inflation may only be 2% now, but this is seen as just the start. According to the corporate research institute Teikoku databankprices for more than 10,000 food items are set to go up by an average of 13% this year.

Given that wages have hardly risen in 30 years, this makes the inflation pill a tough one to swallow. But according to the BOJ, low interest rates are a remedy for a lockdown ravaged economy, a view perhaps carried over from the days of deflation when low rates were seen as the best way to encourage borrowing and spending.

But those in the know here in Tokyo suspect the real reason is the stubbornness of BOJ governor Haruhiko Kuroda, who wishes to see out his remaining year in post with his reputation as a low-rate governor, whatever the impact on the economy.

If the latter is true, it raises the question of why PM Fumio Kishida, who is a former banker himself and thus unusually economically literate for a national leader, doesn’t just dismiss Kuroda. The weakened currency has helped exporters but pushed up costs of imported goods significantly and led to strong criticism within and without Japan.

Still, this would be an almost move, and Kishida is probably banking on the Yohei Fukuda philosophy still holding true. In this, he is probably correct. A recent increase in subway fares (up by around 10 pence) made headline news and forced apologies from Japan railways. And an ice cream maker went so far as to produce a TV commercial featuring the entire staff apologising for their first price hike (of around 5 pence) in 25 years. A bakery near me put a blackboard outside their shop explaining in detail, and apologising profusely, for a negligible increase in prices necessitated by a rise in the cost of flour. I go there nearly every day and I hadn’t even noticed.

All of this is closely related to the Japanese quality of ‘gaman’ or endurance, a handy national attribute in times of difficulty. The Japanese seem almost to relish adversity, and a little tightening of purse strings will probably be tolerated, and perhaps even welcomed, as a chance to display one’s hardiness and commitment to the nation.

This national trait has arguably been renewed and perhaps even strengthened by the pandemic. Few Japanese took the opportunity to work at home when it was offered, and almost no one has removed their face masks despite official government guidance that they needn’t be worn outside anymore.

Thus, Kishida will likely refrain as he sees no immediate need for action. His approval ratings are at record levels thanks to his reputation for decisiveness and reasonable manner.

What this means is that in the near nothing will happen, except the yen is likely to continue falling for a while yet, and people’s lives will get harder. But with Kuroda due to step down next year, Kishida can afford to wait it out and when the time comes install a more amenable successor.