Special

Article 2Moderate Inflation May Be Achieved– the Outlook from Statistics
By Nariyasu Yamasawa

Introduction
The rate of inflation rate is rising globally. Disruption to supply
chains due to the spread of novel coronavirus infections has caused
restrictions in supplies of electronic parts such as semiconductors,
and in addition Russia’s invasion of Ukraine in 2022 has led to a risein energy prices. While Japan’s inflation rate is comparatively low, it
has been continuing to rise and the upward trend is expected tocontinue.
This article summarizes the current state of inflation in Japan andits outlook. Diverse factors behind inflation are reviewed, and thelinkage between wages and prices in particular is examined.
It is not the case that there has been a dramatic structural change
in the Japanese economy following the spread of Covid-19, and thereis therefore a possibility of a reversion to the previous deflationary
economy. Employment adjustment subsidies were effective in limiting
a rise in the unemployment rate, but the regeneration of companies
has hardly occurred. However, there were major changes toinflationary expectations. As moderate inflationary expectations are
created, and if moderate increases in wages occur, there may be apossibility of overcoming a deflationary economy.

Global Inflation Trend After 2021
Prices have been soaring across the world. In 2020, the impact of
the spread of Covid-19 caused restrictions in movements, anddemand dropped with prices on a downward trend. But since 2021,
prices have been rising due to the impact of restrictions in supplies.
According to the Bureau of Labor Statistics in the United States, theUS inflation rate remained high at around 10% year-on-year at one
point, but its rise has now slowed. The consumer price index (CPI)for April 2023 was up by 4.9% compared to the same month in theprevious year. The main reason behind the slowdown is energy prices
passing their peak to become negative year-on-year. Prices for othercommodities are rising and the CPI (overall) excluding food andenergy was up by 5.5%. Inflationary pressure is still firm.
According to Eurostat, the consumer price index for the Eurozone
for April 2023 was up by 7.0% year-on-year. The rate of rise slowedwith a fall in resource prices, but on a basis excluding food andenergy it was a high 5.6%. Inflation is especially high in Germany and
Italy, and inflation continues to accelerate. According to the Office of
National Statistics of the United Kingdom, a labor shortage ishttps://www.jef.or.jp/journal/

AuthorNariyasu Yamasawa

encouraging inflation in the UK. Although the peak has passed, thefigure for April was still at a high level of 7.8%.

Japan’s Core Core Inflation Rate on Rising Trend
According to the Ministry of Internal Affairs and Communications,the CPI in Japan for March 2023 was up by 3.2% year-on-year for theoverall index. The rate of rise has been falling since its peak at 4.0%
in January 2023, but the main reason behind the fall is the “electricity
and gas price fluctuation mitigation project” by the government. The
ministry estimates that the index dropped by 1 percentage point
counting this policy as a factor. Without this portion, prices were up
by 4% and inflation has not calmed down.
Doing a factor analysis, while energy, which had thus far been an
upward factor by around 1 percentage point, has remained at anegative 0.3 percentage point with the aforementioned policy, food
was an upward factor by 2.0 percentage points. The rise in prices offood is likely to continue. Teikoku Databank announced that 195
major food manufacturers will raise prices for 824 products in May, athree-fold increase from the same month in the previous year. The
forces behind rising prices have not abated.
What should be noted is that the “core core CPI”, which is noteasily affected by weather or external factors, is on a rising trend(Chart 1). In Japan, the core core CPI is the overall index for a basketof goods excluding the prices of fresh food (excluding liquor) andenergy. It has exceeded 2% for two consecutive months since
February 2023, with March 2023 seeing a rise of 2.3%. This indicatesthat rises in prices for a vast array of goods and services arecontinuing, and also that the trend of inflation is ongoing.
Movements in the GDP deflator are also important. The GDP
deflator can be calculated by dividing nominal GDP by real GDP. The
CPI studies prices of goods and services that consumers purchase,but the GDP deflator shows inflation that occurs due to domestic
factors within Japan (homemade inflation). For example, when importprices rise, unless they are passed on to domestic prices the GDP
deflator becomes negative. Imports are deducted items from GDP,and therefore when only import prices rise, the GDP deflator becomes
negative. Japanese companies have been trying not to raise domestic
prices even when import prices rise, and thus the GDP deflator had
been trending in negative territory. However, recently there have been
an increasing number of companies passing on the rise in importprices to domestic prices. The GDP deflator for the period JanuaryJapan SPOTLIGHT • July / August 2023

31

March 2023, which the Cabinet Office has released, was a rise of
1.2% year-on-year, and it is highly likely that this upward trend willremain fixed

Rise in Prices Beyond Expectation

2023, 2.1% for fiscal 2023 and 1.4% for fiscal 2024 are estimated,
and the forecast does not see inflation expanding. It is below 2% forfiscal 2024 and it can be seen as anticipating a reversal to a
deflationary economy.

Weak Upward Pressure from the Economy

By looking at the forecasted values of economists, it can be
confirmed that Japan’s rise in prices is progressing more thanpreviously estimated. The “ESP Forecast” released by the Japan
Center for Economic Research is a survey which aggregates
forecasted values of Japan’s leading economists. Chart 2 collects
these outlooks for the inflation rate (overall, excluding fresh food)after April 2020.
First, looking at the trend in forecasted value for fiscal 2020, as ofApril 2020 the impact of decreased demand due to the spread ofcoronavirus infections was emphasized, and the outlook for the
inflation rate for fiscal 2020 was a negative 0.1%. It was revised
downward to a negative 0.4% in April 2021 and the actual value wasalso a fall of 0.4%.
The inflation outlook for fiscal 2021 was gradually revised
downward. As of April 2020, it was a 0.4% forecast but as of April
2021 it became 0.3%. In April 2022, it became 0.1% and the actual
rate was flat at 0.0%. But the revision range was small and it can besaid that it turned out largely in line with the outlook.
A major revision to the outlook was seen for fiscal 2022. The
outlook as of April 2021 was 0.6%, but in April 2022 it became 1.7%.
The response period for that month was from March 31 to April 7,
and therefore the impact of Russia’s invasion of Ukraine in March isconsidered to have been factored in somewhat. But revision of theforecasted value continued, and in April 2023 it was 3.0%, with theactual rate being 3.1%. This means that the forecast was revised
upwards by 2.4 percentage points in two years.
However, looking at the most recent forecast value as of April

Let us examine the factors that impact prices. Factors such as
economic trends, import prices, wages and inflation expectations
come to mind. As prices are referred to as being the bodytemperature of the economy, it is impacted by consumer trends.
When the economy is doing well, demand exceeds supply whichbecomes an upward pressure on prices, but when the economy isbad, prices become a downward pressure.
Every month, the government releases its “Monthly Economic
Report” which reports on the state of the economy. In the report for
April 2023, it states that “while part of the economy is showing
weakness, it is slowly recovering”, indicating that the economy is on arecovery path. However, while as of December 2022 it said pointblank “the economy is gradually recovering”, since January 2023 thewords “while sections show weakness” have been added, indicatingthat the forces for economic recovery are weak.
Looking at the coincident index of the diffusion index which the
Cabinet Office releases, having dropped significantly with the start ofthe spread of Covid-19, it is now on a recovery path. However, theeconomy is not in a state where it is visibly better after the start of2023. Assessment of the current situation as of February 2023, which
the Cabinet Office mechanically produces from movements of the
diffusion index, was a “standstill”.
Looking at the National Short-Term Economic Survey ofEnterprises in Japan (Tankan) released by the Bank of Japan,
business sentiment DI (“good” – “bad”) for large companies andmanufacturing industries surveyed in March 2023 was worse for the

CHART 1

CHART 2

Inflation rate outlook by point of
estimation

Rising trend of core core CPI
continues (contribution displayed)(Percentage point)

(%)

5

4.0

Core core CPI(excluding information and communication related costs)

4

Food

3

3.0

3.0

EnergyInformation and communication related costs

2.2

Overall

2

2.0

1

1.6

1.0

0.4 0.3
0.1

0
0.0

23/03

22/12

22/09

22/06

22/03

21/12

21/09

21/06

21/03

20/12

20/09

20/06

20/03

19/12

19/09

19/06

-2

19/03

-1

Source: Ministry of Internal Affairs and Communications “Consumer Price Index”. Overall
index is the rate of rise, and others are contributions to the overall index.

32 Japan SPOTLIGHT • July / August 2023

-1.0

-0.1

2020

0.6

Apr-20

-0.4

2021

1.4
0.8

2022

Apr-21

Apr-222023

Apr-232024(Fiscal year)

Source: Japan Center for Economic Research “ESP Forecast”. Forecasted value of year-on-year
rate of rise for consumer price index (overall). Actual rate for fiscal 2020 was a negative
0.4%, 0.0% for fiscal 2021 and 3.1% for fiscal 2022.

fifth consecutive quarter. Supply and demand conditions DI (“excess
demand” – “excess supply”) for domestic products and services forthe same period were negative (excess supply) for bothmanufacturing and non-manufacturing industries, and upward
pressure on prices from supply and demand was weak.

Rises in Import Prices
Import prices are affected by movements in primary commodity
prices such as crude oil prices, and the exchange rate of the yen
against the US dollar. Since the spread of the coronavirus,
international commodity prices have risen. This is because demand
for goods has increased while service activities, on the other hand,
have been restricted.
Russia’s invasion of Ukraine further enhanced this movement.
Ukraine is a major producer of wheat and corn, and concerns over its
supplies stalling have pushed up prices of agricultural products.
Economic sanctions against Russia have caused the supply of
Russian crude oil to drop and crude oil prices rose sharply. Since thesummer of 2022, the possibility of crude oil prices continuing to risehas declined with increased supply of US crude oil. Looking at importprices of crude oil on a customs clearance basis (when it has cleared
Japanese customs), it has turned to a decline after its peak in July
2022 at $119 per barrel, and since 2023 it has been trending at a level
below $100 per barrel.
The yen-dollar exchange rate also hugely affects yen-denominatedimport prices. With an expanding gap between interest rates in Japanand in the US, the exchange rate saw a weak yen close to 150 yen to
the dollar in the fall of 2022, but it is currently trending at around 130
yen to the dollar. The rise in dollar-denominated import prices
combined with a weak yen resulted in yen-denominated import prices
rising sharply at one point, but this movement has now stopped, andyen-denominated import prices are now expected to trend calmly
compared to the previous year.

periodic wage increases are a factor of increases for individual
workers, if the age structure does not change, overall wages do notchange. The part that increases the costs for companies is the basic
level of wages.
Since the 2000s, companies have not conducted basic-level wage
raises, regardless of the labor supply and demand. Chart 3 shows thespring wage increase rate from fiscal 1975 to fiscal 2022 and theactive job openings-to-applicants ratio (previous fiscal year). This is
the ratio of the number of job offers to the number of job applications,and the higher it is, the stronger the companies’ demand for workers.
Between the 1970s and 1990s, there was a positive relationshipbetween labor supply and demand and wage increases, but since the2000s the rate of wage increases is around 2%. Since periodic wage
increases are around 2%, it shows that the basic level of wages isclose to zero.
The cautious attitude towards wage increases reflects theconservative attitudes of Japanese companies. As a result, “excess
savings” has become normalized for Japanese companies. From asavings-investment balance point of view, companies should
intrinsically become “excess investment” by expanding their businessthrough aggressive investments. But Japanese companies havecontinued to be excess savings since 2000, holding back onaggressive investing and saving up profits instead. Since increasing
wages is also a means of investing in human capital, a more proactive
attitude towards wage increases is desirable (Chart 3).

Labor Supply at Ceiling
One of the reasons why wages are not increasing even when labor
supply and demand is tight, is the rise in labor supply of women andthe elderly, with the labor participation rate for both having been
continuously rising.
Because women leave the workforce due to pregnancy and giving
CHART 3

Wages and prices are closely related. A rise in wages means a risein labor costs and results in costs for companies increasing. It is oneof the factors behind the rise in prices of goods and services.
With prices rising, real wages – which subtract the rate of pricerises from wages – became negative. Hence, the government
requested economic organizations such as the Federation of
Economic Organizations to raise wages, and economic organizations
have been showing a certain degree of understanding. In Japan,
labor-management negotiations over wages which are conducted in
the spring (shunto, spring wage talks) have a huge impact onscheduled wages. The spring wage talks for fiscal 2023 saw thenumber of companies agreeing to wage increases rise.
The spring rate of wage increases can be divided into twoelements: the part where wages increase as a result of being
employed continuously (periodic wage increases) and the part where
the wage standard itself increases (basic level of wages). While

Wages not responding to labor
supply & demand
14

Spring wage increase rate (%)

Wages Not Reflecting Labor Supply & Demand

1975

12
10
8

1991

6
2000

4

2022

2010

2019

2
0

0

0.5

1

1.5

2

Active job openings-to-applicants ratio (previous fiscal year) (times)

Source: Active job openings-to-applicants ratio from the Ministry of Health, Labour andWelfare “Status of Job Referrals”; spring wage increase rate from Ministry of Health,Labour and Welfare “Comprehensive Survey on Wages”.

Japan SPOTLIGHT • July / August 2023

33

birth, and later return, the labor productivity rate has been M-shaped.
In recent years, more women work before and after giving birth, andhence this M-shape is starting to change. The labor participation rate
for women aged 30-34 for the period January-March 2023 was
79.2%, and for women aged 35-39 it was 77.7% – both close to 80%(Chart 4).
The labor participation rate of the elderly is also continuing to rise.
For the period January-March 2023, it was 73.9% for those aged
60-64, 51.6% for those aged 65-69, and 33.8% for those aged 70-74.
They have all increased compared to the same period the previous
year. But looking at the chart, those aged 70-74 seem to have reacheda ceiling, and those in other age groups may sooner or later alsoreach a ceiling.
What will happen when entry of women and the elderly to the labormarket subsides? If labor supply and demand continue to be tighteven after the labor participation rates for both have reached a ceiling,
upward pressure on wages will likely become strong. Companies willpass on increases in wages to prices, and rises in prices will then leadto increases in wages again, creating a continuous spiral.
In fiscal 2023, more companies are agreeing to increase theirbasic-level wages. But the standard does not quite meet thatdemanded by workers. The Japanese Trade Union Confederation
called for a spring wage increase of around 5%, but the actual
increase will likely be around a high 3%. To cause a spiral of prices
and wages, a more-than-expected increase in wages and a rise in
prices are necessary, but the current wage situation does not quite
meet that level of upward pressure.

Change in Inflation Expectations
An important factor impacting prices is inflation expectations.
Inflation expectations are people’s outlook on prices, and as thischanges, so do prices in real life in a self-fulfilling way.
Under a deflationary economy, people thought that “prices are
CHART 4

Labor participation rate of elderly &
women
(%)
90

60-64 years

80

65-69 years

70-74 years

30-34 years (women)
35-39 years (women)

70

something that do not rise”, and therefore prices in real life also did
not go up. Companies were also reluctant to raise prices. If one
company were to raise its prices, rival companies might snatch its
customers. Because market share may be lost, raising prices has
been avoided even at the expense of profits. But if inflation
expectations are that “prices are something that will rise”, it will
become easier for companies to raise prices.
The outlook for prices is changing. There is a break-even inflation
rate which the financial markets look at in assessing price outlooks. It
calculates the inflation outlook in the financial markets by looking
back at movements in inflation-indexed bonds. In 2022, it remained
high at around 1% but has since declined, and as of April 21, 2023 it
is 0.67%. Inflation expectations as seen from the financial markets
are not that great.
The Consumer Confidence Survey of the Cabinet Office isconducted on consumers, and looks at the inflation rate outlook forthe future. It was around 2% in 2020, but sharply rose in 2022, andthe outlook for March 2023 is 4.0%. Inflation expectations among
consumers seem to be changing.

Desired Balance
The desired balance from now on is the co-existence of moderate
inflation and moderate wage increases. This is the normal form often
seen in many countries. One of the reasons why Japan was in a
special state was its low “inflation expectations”. Consumers believed“prices are something that do not rise” and thus kept an especiallykeen eye on price rises. Recently, however, prices have been slowly
rising also for non-food and non-energy goods and services, and“inflation expectations” have been fostered.
Of course, if we see just a rise in prices, demand will cool off andlead to a recession. Moderate wage increases are necessary. A priceand wage spiral should be avoided but companies have room toincrease wages. According to the Financial Statements Statistics ofCorporations by Industry, ordinary profits for the period OctoberDecember 2022 were at their second record level in total of all sizes
and all industries. There is room to increase labor costs. Since a labor
shortage is foreseen in the future, setting attractive wages in order to
upgrade human capital is also essential.
If a moderate increase in wages and a rise in prices of around 2%
continue, interest rates will also rise. This will mean that the Japanese
economy will finally revert to its normal form.
Article translated from the original Japanese by Mio Uchida.

60
50
40
30

Source: Ministry of Internal Affairs and Communications “Labour Force Survey”

34 Japan SPOTLIGHT • July / August 2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

10

2007

20

Nariyasu Yamasawa is a professor of the Faculty of Management at Atomi
University. He has worked for the Nihon Keizai Shimbun (Nikkei) and the Japan
Center for Economic Research, and is a former director of the Statistics
Commission Office at the Ministry of Internal Affairs and Communications.