“Once long-term inflation expectations decline, it is not easy to raise them,” said Takehiro Sato, a member of the policy board at the Bank of Japan, in a talk at the Yale School of Management on March 28. Sato spoke to students and faculty about the roots and consequences of long-term inflation expectations—both in Japan and as a lesson for the global economy.
Although the Bank of Japan has been successful in combating deflation, Sato said, those lessons were learned the hard way. “If Japan’s financial crisis in the late 1990s had been settled more promptly with ample liquidity provision and capital injection,” he said, “the large-scale credit crunch could have been avoided, and thus the subsequent path of Japan’s economy might have been different. This widely shared lesson was put to good use at the time of the global financial crisis afterward.”
In 2013, the bank introduced quantitative and qualitative monetary easing, or QQE. “Japan’s experience refutes the premise for monetary policy that long-term inflation expectations are determined by a central bank,” Sato said. “When a central bank re-anchors long-term inflation expectations toward the target, there will be a limit if monetary policy is the only game in town.”
Since the QQE, Sato has seen the importance of changing entrenched expectations of inflation, with structural policies—such as labor-market reform—that boost participation in the labor force, productivity, and a higher growth rate overall.
As an example, Sato cited changing wage-setting mechanisms by negotiating increases for several years into the future. He also recommended dynamic U.S.-style employment practices that allow worker compensation to reflect risk premiums, with a caveat: “It is important to gain the understanding of labor unions by establishing a social safety net that leads to economic growth.”
Demographic trends, of course, are a significant factor in engineering a recovery. Addressing labor shortages will be a priority, since the Japanese population is dropping precipitously. Offsetting those losses, women’s participation in the labor force in Japan is even higher than in the U.S. Meanwhile, Japanese life expectancy averages 80, the highest in the world, and Sato explained that a new age category has emerged—the “younger old,” who can work for many more years than in previous generations. Those same older workers are enthusiastic consumers, Sato said. Yet young people are more apprehensive, and are far more likely to be frugal than their elders. That, too, can stifle economic growth. As Sato observed, once consumers lose faith in a prosperous future, “it is not easy to rebuild credibility.”
About the Event
Please join us on Tuesday, March 28 for “Lessons of Japan: Focusing on Issues Regarding Long-Term Inflation Expectations,” a Colloquium in Asset Management with Takehiro Sato, member of the policy board, Bank of Japan. The Colloquium in Asset Management is a series of candid talks with leaders of major investment funds, heads of hedge funds, practitioners, and senior research faculty shaping the field.