As prices continue to soar across much of the world, inflation in Japan remains relatively low. That divergence is reflected in the region’s monetary policy: even with most DMs aggressively tightening, Japan has reiterated its pledge to keep conditions ultra-loose. 

This week’s Chart Room identifies one reason why price rises in Japan have remained muted. Supply-side constraints have had far less impact in this country than they have elsewhere. 

In part, that’s because Japan has not suffered from significant worker shortages. Japanese firms held back from laying off workers during the worst of the pandemic and instead opted to cut work hours whilst also benefiting from government subsidies. Moreover, participation rates have stayed relatively elevated, with little evidence of mass labour exoduses like those seen in the West. For the most part, this has kept supply-side problems limited to exogenous factors, such as the global semiconductor shortage. 

Consumer spending in Japan has also been relatively slow to bounce back, reflecting both last summer’s surge of the Delta variant and a cultural hesitance that kept consumer activity limited even as restrictions were lifted. While the impact of the former is starting to fade, the latter is likely to persist.  

The Omicron variant told a similar story. Although it is thought to have heightened inflation across much of the rest of the world as restrictions were lifted, the reduction in Japanese demand when it hit could end up outweighing any supply-driven inflationary spike. In this regard, Japan resembles nearby China. Producer Price Inflation has actually been falling in the country (a claim even Japan can’t make), easing fears that cost rises there will eventually weigh on the consumer.

George Efstathopoulos

George Efstathopoulos

Portfolio Manager