Featured in this podcast are Hiroshi Ugai and Ayako Fujita. Japan’s economy has long faced deflation and disinflation; in this it has been an outlier globally. Unlike in other DMs, reflationary feedback between a tight labor market and inflation has failed. However, the repercussions of the COVID-19 pandemic and especially Russia’s invasion of Ukraine may change that, as other nations limit Russia’s participation in global energy markets, and Japan likely will accelerate the use of high-cost renewable energy to compensate for the loss of fossil fuels, and focus more on economic security than economic efficiency. The resulting persistent input cost pressures could prompt firms to change their price-setting behavior, supported by accommodative macroeconomic policies, and allow Japan to exit its disinflationary equilibrium. While recognizing the caveats that this scenario assumes that the global economy will return to above-trend growth after 1H22 and there will be no premature signal of normalization of the monetary and fiscal policy, we discuss the prospects for Japan’s persistent disinflation to end over the medium term.

This podcast was recorded on Mar 31, 2022.

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