Asian Economic Policy Review最新文献

Ito (2025) provides a comprehensive overview of the recent developments of Japan's economy, focusing on various aspects of the transition toward normalization. It is particularly useful for understanding the economic trajectory during 2022–2024, a period marked by significant macroeconomic changes. My comments relate to: exchange rates, price pass-through, and the role of policies; anchoring inflation expectations; and productivity.

Ito (2025) brilliantly describes the transition of the Japanese economy from a long-stagnating “triple zero” equilibrium with a zero inflation rate, zero expected inflation and zero nominal wage growth prior to 2022, to a new “2-2-3” equilibrium with 2% inflation, 2% expected inflation and 3% nominal wage growth. As Ito notes, the initial shift from the triple-zero equilibrium was driven by cost-push inflation, largely a consequence of the 2022 Russian invasion of Ukraine. I agree that cost-push inflation played a critical role, although government policies aimed at overcoming deflation also contributed significantly. Seizing the opportunity presented by cost-push inflation, the Japanese government has actively promoted raising wages above inflation, as noted by Ito (2025), and has encouraged effective price pass-through, which drastically changed firms' price-setting behavior.

A historical comparison can be drawn with the period of rising oil prices in 2007 and early 2008, when input prices for firms surged, yet output prices saw only marginal increases. However, the current situation is markedly different, as both input and output prices have risen due to more effective price pass-through, as shown in the Tankan survey (Figure S1). Many firms have changed their price-setting behavior, supported by government policies aimed at enhancing price pass-through, especially in transactions between large firms and small and medium enterprises (SMEs). For instance, the Fair Trade Commission and the SME Agency have adopted a “name and shame” approach, disclosing the names of large firms that resist price negotiations with SMEs.

This resulted in a higher pass-through of the exchange rate to domestic consumer prices (Cabinet Office 2024), and the large-scale yen depreciation from 110 to 160 per US dollar during 2022–2024 has had a significant impact on inflation.

This higher pass-through raises an important question: should monetary policy with an inflation target respond to currency deprecations or appreciations? This question is closely related to the trilemma of international finance. In the 2022 episode, we saw some Asian inflation-targeting central banks follow the Fed's rate hikes and raise their interest rates several times to avoid rapid currency depreciations. This helped them contain inflationary pressures from depreciations and reduce large deviations from their inflation targets. The yen depreciation since 2022 has left an important lesson

This paper focuses on three aspects of the Japanese economy that deviated from “normalcy”—unconventional monetary policy, unsustainable fiscal policy, and declining growth and productivity. Non-normality in Japan has developed over the past few decades, but has become more prominent during the Abenomics years starting in 2013. Regaining normalcy in monetary policy requires a gradual increase in the policy interest rate to the neutral interest rate, achieving a 2% inflation rate, and reducing the Bank of Japan's balance sheet by quantitative tightening. Regaining normalcy in fiscal policy requires reducing government fiscal deficits, which tend to ratchet up as the country experiences a crisis. This fiscal tightening has to be done in an environment where monetary normalization proceeds. Japan's per capita GDP relative to other countries has declined over the last three decades. Japan's per capita GDP relative to that of the US in 2025 is about that of 1980. Similarly, the yen's purchasing power in 2025 is similar to what it was in the early 1970s. Japan has become poorer since the mid-1990s. To prevent Japan from further sliding back into the emerging market group, the government has to promote research and development in high-value-added technologies.

The basic idea of Fukuda and Soma (2025) is that the variation in inflation expectations among forecasters is due to their differing forecasts about future output gaps, crude oil prices, and exchange rates. They find that factors like the output gap can explain some of the variation in inflation expectations, but not the majority. Specifically, Fukuda and Soma's (2025) table 2 indicates an R ² around 0.3, suggesting that other hidden variables may play a more significant role in determining the variation in inflation expectations.

In the spring of 2022, economists had two conflicting views when inflation rates began to rise. One view was that the increase in import prices would eventually stop, and when that happened, the rise in domestic prices would also cease (referred to as the “transitory” view). The other view was that domestic prices would continue to rise even after import prices stopped rising (referred to as the “persistent” view). In other words, there was a difference in consumer price index (CPI) inflation expectations depending on whether or not the increase in import prices would permanently impact domestic prices. The sources of such a variation in inflation expectations are not considered in Fukuda and Soma (2025).

In addition, according to Diamond et al. (2020), an individual's expectations of inflation are influenced by the inflation they have experienced in their lifetime. Even among the forecasters participating in the ESP Survey, there are different generations. For example, those who experienced high inflation in the 1970s may have higher inflation expectations, while those who grew up during deflation in the 1990s may have lower inflation expectations. This source of variation in inflation expectations is also not considered in Fukuda and Soma (2025).

The critical point is whether the forecasters' expectations are aligned with the Bank of Japan's (BOJ's) target of 2%. Figure 1 displays the distribution of inflation expectations from around 40 forecasters who participated in the ESP survey. The forecasts were made in September each year (specifically, September 2021, September 2022, September 2023, and September 2024). Their predictions for the inflation rate for the upcoming fiscal year were considered for each forecast time. For example, in September 2021, before inflation began in Japan, the mode of distribution was 0.6%, indicating that most forecasters were predicting an inflation rate close to 0%. However, over time, the distribution has gradually shifted to the right. The most recent survey results from September 2024 show that the mode of distribution is 1.8% to 1.9%, which is quite close to the BOJ's target of 2%. Nonetheless, there is still a significant variation in inflation forecasts, with some forecasters predicting inflation significantly below 2% and others predicting inflation above 2%. This i