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

Author: Adam Button | Category: News

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.