Masayoshi Amamiya: The COVID-19 crisis and inflation dynamics
Opening remarks by Mr Masayoshi Amamiya, Deputy Governor of the Bank of Japan, at the
Workshop on "Issues Surrounding Price Developments during the COVID-19 Pandemic", Tokyo,
29 March 2021.
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Introduction
I would like to thank you for participating in the Bank of Japan's workshop on "Issues Surrounding
Price Developments during the COVID-19 Pandemic." On behalf of the organizers of the
workshop, I would like to share with you our awareness of these issues.
As economies recover from the unprecedented shock of the novel coronavirus (COVID-19)
pandemic, inflation rates in advanced economies have risen at their fastest pace in many years
(Chart 1). In fact, both producer and consumer prices in the United States and Europe recently
recorded their highest rates in decades. In Japan, producer prices have also risen at the highest
rate in about 40 years, i.e., since the second oil shock, but the pace of increase in consumer
prices remains sluggish compared with the United States and Europe. Due to a combination of
dissipation of the effects of last year's reduction in mobile phone charges and a significant rise in
energy prices caused in part by the situation surrounding Ukraine, the rate of increase in Japan's
consumer price index (CPI) from April may be at around 2 percent. Even taking this into account,
there is a clear gap between inflation in Japan and that in the United States and Europe.
The aim of this workshop is to deepen our understanding of prices in Japan by having discussion
with you, representatives from academia, using the analyses by the Bank's staff as a
springboard, focusing first on the differences in price developments at home and abroad during
the pandemic.
A Surge in Inflation in the United States and Europe during the COVID-19 Pandemic
To start with, I will outline factors behind the surge in inflation in the United States and Europe
that have been discussed recently within academia and among central banks. This recent surge
seems to be attributable to the following four factors that have materialized in the wake of the
COVID-19 pandemic, although the factor on which the most importance is placed differs among
economists and by country and region.
The first is an expansion in aggregate demand (Chart 2). Immediately after the outbreak of
COVID-19 in spring 2020, economic activity plunged around the world. As it resumed thereafter,
and with support from fiscal and monetary policies to stimulate economies, aggregate demand
increased sharply and significantly. GDP for the United States clearly surpassed the
prepandemic level last spring and that for Europe recovered to its pre-pandemic level in the second
half of last year. In particular, partly because consumption opportunities were constrained by the
imposition of various restrictions, pent-up demand for private consumption materialized all at
once as the spread of COVID-19 subsided. This has increased labor demand, which in turn has
led to labor shortages and upward pressure on wages. I will talk about the slower recovery in
Japan's GDP relative to the United States and Europe later.
The second factor is a decline in supply capacity, mainly in terms of labor (Chart 3). Immediately
after the outbreak of COVID-19, the United States saw a plunge in labor input resulting from a
surge in the unemployment rate and a decline in the labor force participation rate. As economic
activity resumed thereafter, the unemployment rate has followed a relatively steady declining
trend; however, the labor force participation rate has been slow to recover and, in contrast to
GDP, labor input has not returned to the pre-pandemic level. This is because some people,
particularly seniors, who are more vigilant against COVID-19, have been reluctant to return to the
labor market. In the United States, this phenomenon has been called the "Great Retirement" or
"Great Resignation." Such a decline in the labor force participation rate has not been that evident
in Europe or Japan.
The third factor is a sectoral shift in demand, which is typical in the United States (Chart 4). The
spread of COVID-19 has brought about a major shift in demand from services to goods, and an
excess supply of face-to-face services and excess demand for automobiles and digital-related
goods have been particularly notable. As a result, a mismatch between supply and demand for
individual items has been increasingly severe and there have been semiconductor shortages and
logistical constraints. Theoretically, a mismatch between supply and demand for individual items
only causes changes in relative prices. In practice, however, such a mismatch puts upward
pressure on general prices because there is downward nominal price rigidity. In contrast to the
United States, the shift in demand has been limited in Japan.
The fourth factor is a surge in energy prices (Chart 5). The rise in energy prices since last year is
mostly due to the endogenous factor of an expansion in demand for resources brought about by
a global resumption of economic activity. Thus, it is true that, to a large extent, the rise in energy
prices should be regarded as a "consequence" of the expanded demand rather than a "cause" of
the recent inflation. However, in the current phase, the rise in energy prices has been amplified
by exogenous factors from the supply side, such as firms holding back their capital investment
related to fossil fuels with a view toward decarbonization and heightened geopolitical risks given,
for example, the situation surrounding Ukraine.
While the rise in inflation in the United States and Europe is the result of a combination of the
various factors mentioned, there has been a heated debate since last year among prominent
academic economists and central bank economists over whether the recent inflation is transitory
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or persistent. Actual price developments to date seem to suggest that inflation has become
more persistent (Chart 6). In fact, inflation forecasts of the Federal Reserve and the European
Central Bank show that, while the forecasts for 2020 were revised downward immediately after
the outbreak of COVID-19, those for 2021 were revised upward over time, and the actual inflation
rates for 2021 clearly surpassed the 2 percent inflation target. The upward revisions to the
forecasts for 2022 have continued even after the turn of the year, and there is no sign so far that
the situation will reverse.
However, as Emeritus Professor Blanchard, one of the economists involved in the debate, has
stated it is "only half time," the future course of inflation is still uncertain and the debate has not
been settled yet. In particular, there is a certain persuasiveness to the view that there has been
no fundamental change in the reasons for low inflation - namely, the decline in firms' pricing
power as a result of globalization and digitalization - that have been pointed out since before the
pandemic. Therefore, there is a reasonable likelihood that, once the impact of COVID-19 wanes
and supply-side constraints and demand shifts subside, economies will return to a low inflation
regime. At any rate, the recent experience of high inflation in the United States and Europe
illustrates the difficulty of assessing the nature of shocks and their persistence in real time.
Why Is Inflation in Japan Weaker than in the United States and Europe?
Next, I would like to present three hypotheses regarding the reasons for the weak inflation in
Japan relative to the United States and Europe.
First, the factors that I pointed out earlier as causes of the surge in inflation in the United States
and Europe have not been that pronounced in Japan. That is, due in part to Japanese
households' strong risk aversion, pent-up demand for private consumption has been limited so
far (Chart 2). Consequently, Japan's real GDP still has not recovered to the pre-pandemic level
seen in 2019. In addition, it has remained relatively easy for Japanese firms to hoard labor,
because the labor market is not as fluid as in the United States and employment adjustment
subsidies have been substantial (Chart 3). As a result, in Japan, the number of people leaving
their jobs has shown no marked increase, which is particularly the case for regular employees,
and supply-side constraints caused by a decline in the labor force participation rate have been
limited. Furthermore, overall demand has been relatively weak in Japan, and demand shifts from
services to goods have been somewhat slow (Chart 4). Japan therefore has not seen a surge in
goods prices like the one observed in the United States.
Second, the current phase has once again brought to the fore the "norm" in Japan - that is, the
Japanese-specific behavior of firms based on the assumption that prices will not increase easily
(Chart 7). For example, the supply shortages of automobiles due to difficulties in procuring
semiconductors are a global phenomenon, but increases in automobile prices have varied
across economies and have been pronounced in the United States. While the varying degrees of
increase are partly because supply-side constraints in Japan have not been as severe as in the
United States and Europe - as shown by developments in the respective delivery delay indexes
of the Purchasing Managers' Index (PMI) - they are also attributable to Japanese firms' cautious
price-setting stance. When there are supply-side constraints for certain goods, U.S. firms tend to
raise prices relatively quickly and allocate goods by giving preference to customers who are
willing to pay higher prices. In contrast, Japanese firms seem to place more emphasis on
longterm business relationships with customers and respond to their demand as much as possible
while keeping selling prices unchanged. In fact, lead-lag correlation coefficients between the
delivery delay index and the output prices index for the respective economies show that the
correlation is statistically significantly lower in Japan than in the United States and Europe,
suggesting that Japanese firms have been hesitant to raise prices even when faced with
supplyside constraints. Such a cautious stance among Japanese firms has likewise been seen in the
labor market; even when faced with labor shortages, for example, Japanese firms prioritize
maintaining employment in the long term and have been reluctant to raise wages.
Third, issues concerning the measurement of price indexes may also have a non-negligible
impact on Japan's inflation rate (Chart 8). Services prices in Japan's CPI show that price
developments in housing rent and mobile phone charges, both of which have relatively large
weights, have been weaker in recent years than those in the United States and Europe. The two
items are typical examples of services for which prices are difficult to measure with a high
degree of accuracy. I think it would be worthwhile to deepen our understanding of the differences
across countries and regions in terms of statistical practices.
Conclusion
I have described the differences in inflation in the United States, Europe, and Japan that have
been brought to light once again by the pandemic. To conclude, I would like to talk about
something that I have long been wondering about with regard to the difference in inflation rates
between Japan and the United States from a longer-term perspective (Chart 9). The fact that
Japan's inflation rate is below that of the United States is not a phenomenon that began in the
second half of the 1990s, which was during the deflationary period, but one that has continued
since the second oil shock. Before around 1980, Japan consistently had higher inflation than the
United States, and it was Japan that suffered a surge in inflation at the time of the first oil shock,
having the highest rate among advanced economies, at over 20 percent.
It is well known that the bitter experiences of the two oil shocks and stagflation have led to the
rapid development of theories on inflation expectations within academia, and that these theories
have had a significant impact on the monetary policy conduct of central banks, including the
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Bank of Japan. Monetary policy conduct that takes the importance of inflation expectations into
account has led to the low and stable inflation rates in Japan and the United States since the
1980s, and it could be said that this is the result of close interactions between academia and
policymakers. However, there has not really been a very convincing explanation for why Japan
and the United States switched places in terms of their respective inflation rates around 1980,
and why inflation in Japan has remained consistently below that in the United States since then,
including during the period of Japan's economic overheating in the second half of the 1980s.
The differences in inflation dynamics across economies following the COVID-19 crisis and the
inflation differentials between Japan and the United States over the long term have renewed my
awareness that our understanding of inflation remains limited. I have the impression that this kind
of awareness is generally shared by officials in other countries and regions as well, given that
central bankers have viewed being "humble" as the key since the outbreak of COVID-19. Instead
of being boxed in by our conventional views, I think it is important for us to be humble in
examining the actual price data to understand why inflation in Japan is weaker than in the United
States and Europe, whether the reasons are structural, and whether any of this is likely to
change in the future. I hope that this workshop, through an active exchange of views with experts
and scholars, will advance our understanding of inflation, including the points I just mentioned.
Thank you very much for your attention.
1
Macroeconomists such as Emeritus Professor Olivier Blanchard and Professor Lawrence H. Summers have
warned since relatively early on about the risk of persistent high inflation, arguing that aggregate demand
expanded by massive U.S. fiscal spending and its multiplier effect is highly likely to go well beyond the potential
supply capacity. In contrast, scholars such as Professor Paul Krugman and authorities such as the Federal
Reserve and the International Monetary Fund have argued that supply-side constraints and shifts in demand are
to a large extent transitory factors brought about by the pandemic, and that the increase in inflation is likely to
moderate relatively quickly. For an example of a debate among academic economists and central bank
economists, see Furman, J., "Why Did Almost Nobody See Inflation Coming?" Project Syndicate, January 17,
2022,www.project-syndicate.org/commentary/2021-us-inflation-forecasting-errors-economic-models-by-jasonfurman-2022-01.
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It already had been pointed out in a monthly bulletin that the Bank published in 1975 that, as a result of an
upward shift in the short-term Phillips curve due to a rise in inflation expectations, the long-term Phillips curve
becomes vertical. For details, see "1970-nendai no sekai infureshon," Chosa Geppo (February 1975): pp. 1-15.
For a history of the Bank's use of the Phillips curve in its assessment of price developments, see Hara, N.,
Koike, R., and Sekine, T., "Firippusu kyokusen to Nippon Ginko," Bank of Japan Review Series, no. 20-J-3, April
2020.