In the 90s of the 20th century, Japan's bubble economy burst. Since then, Japan has entered an "era of deflation" that has lasted for 30 years. How to get rid of deflation has become a long-term issue for Japan. In the wake of the pandemic, global inflation, which had once become history, struck. Japan is no exception, since 2022, the news of domestic food and other *** in Japan can be seen everywhere, and the price system has changed a lot, but for the people living in Japan, deflation is still the biggest problem: prices have increased, but wages have not increased. Japan may be at the brink of the worst, and at a crossroads where it needs to make a choice. 
Written by Amu Watanabe
Translated by Pei Guifen
Published by CITIC Publishing Group
In his new book "Inflation or Deflation: The Myth of the Global Economy", the well-known Japanese scholar Watanabe provides a new perspective on Japan's deflationary dilemma, and explains the unique opportunities and great challenges facing Japan in the era of great inflation by analyzing Japan's policy measures to deal with deflation.
The wage-price paradigmHow has it hindered Japan's development?
Since the mid-90s of the 20th century, when the economy fell into a trough, Japan's constant price level has lasted for 1 4 centuries, and goods and services have remained almost motionless.
And all of this stems from the change in consumer expectations. Consumers are worried about the financial crisis triggering job losses and are starting to save money. In this process, consumers are quite sensitive, and companies do not dare to raise the product, and all operators adopt conservative strategies and freeze wages. Based on this consideration, both **and wages have suddenly stopped**. However, in the 21st century, although Japan's economy has entered a boom channel, the ** and wages are still hovering at low levels, and they are still motionless as if they are frozen, and this state continues to this day. This is no accident, for consumers, if wages are frozen and ***, daily life is difficult to continue; For enterprises, if the wages remain unchanged and the products remain unchanged, the business operation will also be in trouble, so it will not work if the wages are frozen and the wages are not frozen. As a result, the simultaneous freezing of ** and wages is considered to be an "equilibrium compromise point" between the two. Although consumers want to raise wages and companies are willing to raise the price of their products, it is also a good situation for both parties to remain the same if no one is able to do so. Because of this, Japan's wage and price freeze continues to this day. For the Japanese, it has become the norm that products are not productive. According to this common sense, if you find that a store that shops frequently has an increase in price, people will usually think that the price increase in this store must be caused by some special factor, and that other stores may not increase in price without a special reason. Since it is expected that other stores will be cheaper, it is natural that they will not buy goods with increased prices at the original store, but will turn around and go to other stores to buy. Not only Japanese consumers have no expectations for price increases, but Japanese companies are also familiar with this, and even if there are raw material companies, they are not willing to improve their products. The coexistence of consumers' "hateful price increases" and corporate "freeze practices" has become a matter of course for people living in Japan. This kind of society is naturally called a "social norm" in economics, and the phenomenon that prices and wages should be frozen is called the Japanese "wage price paradigm." When former Japanese Prime Minister Shinzo was in office, he launched a package of financial, fiscal, and economic structural reforms in an attempt to change the paradigm of the Japanese people's thinking. At the heart of this package is the Bank of Japan's epoch-making quantitative easing monetary policy. In other words, it is a strong signal that the amount of money will continue to increase not only now but also in the future. The epoch-making monetary easing policy did bring about a sharp depreciation of the yen as the policy intended, but when the effect of the policy spread to prices, the Japanese people began to complain that this was due to the fact that wages were not raised, and as a result, the paradigm reform ended in failure.
After the pandemic,New opportunities for Japan?
At the beginning of 2020, the world was suddenly threatened by the coronavirus pandemic, economic activity quickly came to a standstill, and the global economy fell into a rapid recession. The epidemic has challenged the modern economic system in an unprecedented way, paralyzed the global logistics network built by the rapid development of economic globalization in the 21st century, cut off the global chain network, and led to the emergence of global products. However, real inflation did not come at the same time as the pandemic, but there is a certain time lag. In the wake of the pandemic, the behavior of workers and consumers has not returned to business as expected, but has gone off track. Employees who are accustomed to working remotely refuse to return to their original offices; There have also been unexpected changes in consumer behavior, in order to avoid crowded places, or to maintain physical distance from others, consumers have changed in what they consume and consume. Those products that consumers consume intensively are in sync with the world due to insufficient production capacity, and the Japanese people's expectations of inflation have changed. The Cabinet Office conducts a monthly "Consumption Trend Survey" of about 8,400 households, and one of the options is the expected inflation rate in the coming year. According to the results of the survey, inflation expectations began to rise in the fall of 2020 and have increased by 4% so far. Real inflation rate for the same period**3At 5%, the expected inflation rate of the Japanese people exceeded the actual inflation level. When Japanese consumers' inflation expectations have risen and their mentality of hating price increases has changed, Japanese companies are also considering changes. Before that, the reason why companies did not raise prices was that they were worried that the price increase would lose customers, but now they don't have to worry so much about customer loss, and they may change the practice of freezing. Although consumers have to accept ***, this situation is unsustainable without changing the wage freeze. The fundamental solution to the paradigm is to abandon the practice of "** wages are unchanged" and turn to the paradigm of "** wages are **". In fact, Japan is now at a fork in the road, and there are two paths ahead: one is to continue to maintain the current paradigm; The other is to turn to the same paradigm as European and American countries and return to normal countries. If we follow the first path, prices begin to rise and wages do not change, and the real purchasing power of the worker falls, the only way to survive is to thrift. As a result, people's consumption declines, and so does GDP. At the moment, Japan has the opportunity to develop along the second path. Inflation expectations have increased, and consumers' aversion to price increases has begun to improve, and Japanese consumers have become not much different from their European and American counterparts. Now it's the turn of businesses to act. The ability of companies to confidently pass on the cost burden to their products** is the primary obstacle to ending the no-price practice of price increases. Another obstacle is whether companies can be proactive in raising wages. For this problem, companies are not only slow to act, but also very pessimistic about the future wage increase expectations, compared with Europe and the United States.
How Japan got rid ofWage price freeze mode?
The wage-price spiral refers to the fact that wages lead to prices, which in turn prompt workers to demand higher wages, thus forming a continuous cycle. Such a process could lead to an increase in inflation, affecting economic stability and development. For Japan, inflation is still low, and there is no need to worry about a wage-price spiral, but this is not to say that Japan has nothing to do with this wage-price spiral. Japan is facing a wage and price spiral. The most important feature of the wage-price spiral that Europe and the United States are worried about is the self-realization mechanism of inflation expectations, which also appears in the Japanese spiral model, that is, the reason why workers do not ask for wage increases is that the expected inflation rate is zero, and because wages rise to zero, the capitation fee does not change, and companies decide not to raise prices, so that the inflation expectations of workers determine the actual inflation rate through the actions of workers and firms. This mechanism is the same as the orthodox spiraling mechanism. The wage-price spiral in European and American countries can adopt monetary tightening to cool overheated demand, which is the orthodox ** solution. But cooling demand will be accompanied by an increase in unemployment, and excessive unemployment costs may be beyond the capacity of society. In this situation, the policy objectives had to be changed, and what needed to be considered at this time was the direct control of wages and **, which was the "alternative" ** scheme of the heretics. The same is true for the Japanese-style wage-price spiral pattern, first of all, to adjust demand according to the orthodox ** program, but the difference is that Japan stimulates demand, for which interest rates need to be lowered. As interest rates fall, the unemployment rate will be lowered, so there is no need to worry about the unemployment rate seriously exceeding the social capacity as in Europe and the United States. But the orthodox ** scheme also has limitations, that is, the limitation of the reduction of interest rates, and negative interest rates cannot be reduced to any desired extent. Once the lower bound is reached, interest rates cannot continue to fall, and demand cannot continue to be stimulated. This is the case with interest rates in Japan, which fell to zero around 2000. The limitations of the orthodox program forced Japan to turn to a heretical "alternative" program. Because the situation in Japan is that wages and prices are frozen, what Japan needs is not direct control of wages and **, but "unfreezing". In Japan, we will take action based on the expectation of "achieving the 2% inflation target set by the Bank of Japan" as an expectation shared by all stakeholders. First, the worker or the union asks for a wage increase consistent with the 2% inflation rate, and secondly, the enterprise accepts the worker's request for a wage increase and raises the product** according to the increase in the capitation fee, so that the 2% inflation rate can be achieved. One of the hardest aspects of this chain of actions is stakeholders sharing 2% inflation expectations and acting accordingly, which is also a problem faced by countries with traditional spirals. For example, if workers do not ask for a wage increase in line with the 2% price (which remains the same as before), the company will not increase the product**, because when consumers are short on money, if they raise the price, the company will lose customers. On the other hand, if a company does not raise prices by 2% and continues to maintain the same price, it will not be able to accept a wage increase from an employee, and even if a worker requests a wage increase, the company will have to reject the employee's request for a wage increase because it realizes that the profit will deteriorate, and if the employee insists on making a strong request for a wage increase, it may endanger the job. Whether Japan can seize the period of great changes in the world, break the "wage price freeze model", and achieve a wage freeze has reached a critical juncture. It is still impossible to judge where Japanese society will go in the future, but there is no doubt that Japan is facing a choice that has not been seen in decades. * * Group Academy; Compiled from CITIC Publishing Group's "Inflation, or Deflation".