Japanese Prime Minister Shinzo Abe has hit the ground running after being re-elected, tackling Japan’s economic problems head on by asking the Bank of Japan (BOJ) to set an inflation target of 2 percent.
An editorial in the Asahi Shimbun said that when the bank agreed to comply with Abe’s policy, the central bank had essentially surrendered to the new administration. However, even if Abe has got the central bank to do his bidding, it will not necessarily benefit the economy unless he can deal with the public’s “bean sprouts economics.”
Anyone who watches Japanese television will know that shows about cooking on a budget have recently become popular. Bean sprouts are frequently featured on these shows, where they are touted as an inexpensive yet nutritious ingredient that make an excellent meat substitute.
Pound for pound, bean sprouts cost one-tenth as much as meat, and contain carotene, protein and vitamin C, as well as being low in calories.
Interestingly, the rate of bean sprouts consumption can tell us a lot about deflation in Japan. Statistics show that the consumption of bean sprouts by Japanese households increased two-fold in the period from 2005 to 2009, with the fastest increase being seen between 2008 and 2009 — when the financial crisis bit.
Bean sprouts economics describes how people respond to tough financial times, how when incomes fall they tend to consume less expensive products to save on costs. The trouble with this is that consumers tightening their belts under these conditions contributes to deflation.
When Abe says he wants to achieve 2 percent inflation, he is talking about the central bank printing more money and buying back national debt from other banks to circulate more currency in the market, reducing the value of money in people’s pockets. According to Abe’s economics, when consumers who are inclined to save money understand that the yen is losing value over time, they will be more likely to spend, and this will stimulate the economy.
Abe’s economic policy fits perfectly with what one would find in economics textbooks. When there is deflation, consumers expect prices to fall and are consequently more reluctant to purchase goods in the short term. In addition, in a country where housing prices are declining year after year, nobody wants to invest in property.
However, Japanese consumers’ tendency to tighten their belts is caused by a set of structural factors: the poor global economy; declining domestic demand due to an aging population and falling birthrate; and the continued fall in value of salaries in real terms.
These factors are leading Japanese consumers to forgo expensive products like meat in favor of cheaper substitutes. Relying on the central bank issuing more money alone is going to have a very limited impact on these structural factors. Another problem is that, inflation will have a different effect on some consumers.
In recent years, due to structural changes in manufacturing and an increase in temping, the number of working poor in Japan — those earning ￥2 million (US$22,000) or less a year — has gone up to almost 11 million. If Abe’s economic policies fail to raise the salary of these low-income earners, inflation is going to make them poorer.
Inflation is no miracle cure for economic stagnation. Making the price of bean sprouts go up by 20 percent a year is not enough to make consumers who use them as a meat substitute start buying meat again, because the price of meat will increase correspondingly. If Abe wants to improve the Japanese economy, he is going to have to beef up his economic policy.