Why is inflation so low in Japan?

Why is inflation in Japan lower?

Japan’s economy has faced the same pressures as those of other countries, policy institute Chatham House notes. This includes the food and energy crises that followed Russia’s invasion of Ukraine, and supply chain issues as economies bounced back from COVID-19.
Two factors, though, may be behind Japan’s lower inflation.
The first involves certain state controls that can limit price rises, Chatham House explains. Gas and electricity regulations dictate that price hikes can only happen gradually. This means utility companies tend to secure long-term supply contracts, which in turn stabilizes energy costs.
The situation with wheat is similar. Japan imports most of its wheat through a government organization that fixes resale prices for six months at a time. This has helped the country avoid the worst impacts of rising wheat prices following Russia’s invasion of Ukraine.

Japan’s pandemic recovery

The second reason inflation may be lower in Japan is the slower pace of its recovery from COVID-19 than other G7 economies.
Tokyo lifted restrictions on economic activity more gradually. This helped limit inflation by “delaying the post-pandemic increase in demand that many other countries have seen”, explains Yasumune Kano for Chatham House.
Economic intelligence specialist Focus Economics lists some other drivers for low inflation in Japan.
Domestic demand in Japan is weak and this is keeping prices low, the organization says. This weak demand is partly a result of low wages. Factors keeping wages low include more than a third of all jobs being part time or contract work. Unions are also focused on job security rather than higher pay, Focus Economics says.

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Negative interest rates in Japan

When interest rates – the cost of borrowing money – are very low, consumers typically respond by spending more.
But this hasn’t been the case in Japan, where interest rates have been below zero for six years, at -0.1%. They also haven’t been above 0.5% since 1995, Bloomberg reports.
Japan’s ageing and falling population is behind this low consumer demand, which is helping to keep down the inflation in Japan, Bloomberg adds. Older people are saving more and spending less to make up for the lack of return on their savings because of negative interest rates.
Japanese companies are also “persistent savers”, Bloomberg says.
Japan’s labour force peaked in the early 1990s at just under 70% of the population, according to the International Monetary Fund. The labour force is now below 60%, making it the lowest among G7 nations. Japan’s population shrank by 300,000 last year.