Japan has virtually given up on reaching 2% inflation after nearly six years of trying. An argument gaining ground in Tokyo holds that the inflation goal, once seen as paramount, doesn’t matter so much after all.
Six years? How about 20 years? Here are the past two decades of inflation in Japan:
There’s a grand total of one year above 2 percent. What’s more, over the course of two decades Japan has only two years over 1 percent. By my back-of-the-envelope noodling, prices have risen a cumulative total of about 1 percent between 1998 and 2018. That compares to a cumulative increase of about 54 percent in the United States. Of course, you might wonder if anyone should even care about this when you compare economic growth in Japan vs. the US:
Total GDP in the US has grown faster than in Japan, but that’s because our population is increasing while theirs is declining. If you look at GDP per working-age adult, both countries are doing about the same. In fact, Japan is doing slightly better.
So who needs inflation? I keep wondering this for two reasons. First, the case for positive inflation is that it allows the central bank to set effectively negative interest rates during a recession, and this allows a faster recovery than a merely zero interest rate. But does it? Japan seems to have recovered from the Great Recession about as quickly as we did.
Second, it remains unclear to me how central banks can produce inflation on demand. In theory, they can produce any inflation rate they want, but in practice they seem to have very little control over it. They can lower the inflation rate by crashing the economy, but they don’t really seem to know how to increase it.
In other words, I remain befuddled. The conventional wisdom suggests that, if anything, the US should have an inflation target of 4 percent, not 2 percent. I’ve always accepted this. But how do we get there? And is there really much evidence that it would help us even if we did?