The Bank of Japan could re-write the playbook on defeating deflation

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What economists don’t like to tell you is that price inflation doesn’t really matter. Prices can only go up for so long until people can’t afford the good.

What matters is wage inflation, which can spiral out of control. Here’s the corollary, what if you’re stuck in a nearly 20-year deflationary cycle? Why not go right to the heart of the matter and target wage increases? That’s what the Bank of Japan is aiming for:

People familiar with the BOJ’s thinking say that it is concerned that if base salaries don’t increase, the move toward inflation may end up being temporary… wages tend to increase about six months after consumer prices start to rise, according to the BOJ, but many economists say that such a correlation has weakened as result of factors such as new labor regulations and globalization.

If the BOJ and the Japanese government are able to persuade companies to raise wages, and it works, it could re-write the economics textbook on how to defeat deflation.

Author: Adam Button

Adam Button is the managing editor of ForexLive™. He was previously the chief currency strategist at XForex and has also worked with Intermarket Strategy. Adam believes there's an edge in knowing every tidbit of news. He was formerly the head of the markets team at the Canadian Economic Press and is a graduate of Ryerson University. Adam lives in Montreal, follow him on Twitter: @FX_Button.

2013-10-19T15:40:25+0000

All|Americas|Bank of Japan

BOJ|deflation|wages

Adam Button

8 Comments

  1. “The economy’s not doing well. Give me a raise.” I like it.
    Your really missing out Adam. It’s +4, windy, no leaves on the trees. We’ve already had a bit of snow.
    Wish you were here. :-)

  2. I read that textbook before. The author’s name was “Herbert Hoover.”

  3. Just proves that 99% of economists are nothing more than appeasing, crowd following sycophants. Companies only raise wages when they have no other choice for labor, cannot outsource or automate, and do not have demands from the stock renters (currently mislabeled as investors) and stock extortionists (currently called activist investors) for dividend payouts and stock buy backs. Basically – Abe’onomics is dead wrong.

  4. 99% of economists are yes-men, I get that. Stock renters/extortionists = speculators. But deflation is good, especially if my wage holds up. Too much supply is a buyer’s market.

  5. Snow? Where are you, in the Yukon?

  6. With a shrinking technology advantage (when it even exists) I can’t see any J companies stepping up for this.
    The gov could lead with a wage hike but I think everyone knows how popular that’d be…
    *Personally I think Japan set out to,do this too fast… Cheap money arrived super quick but reforms are still no where to be seen.

  7. LOL nevermind. Sometimes seems like it. Edmonton Ab. area.

  8. Japan has already lost this fight. Prime Minister Abe just declared 10 days ago in the Financial Times that labor law changes need more time to “explain” to workers. It´s a very “sensitive” issue for the working class.
    Besides, Japan is one of the most automated “just in time” economy in the world. The car industry is a huge example. Production increases can simply executed by pushing a button. Wage increases in times of highly automated industries – dream on!!!!

    Japan´s BOJ policies started with high ambitions. The G20 partners are meanwhile very angered about Japan´s currency policies. If the BOJ “warns” it could do more easing – this is an empty threat. The G20 would react THIS TIME DEFINITELY. Bundesbank´s Weidman has warned already BOJ several times that their easing policy is inappropriate.

    At one point Abe didn´t have the courage that he started with last year when announcing the new measures.

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