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There is concern that inflation will return in OECD countries over the long-term due to population ageing, the energy transition and the shift to regional value chains. But in Japan, there has been no inflation despite population ageing, the energy crisis after Fukushima, the fact that the economy is closed, and the low productivity in services. The example of Japan shows that the functioning of the labour market is decisive for inflation. As long as it is negative for employees, there is no inflation even though other mechanisms are inflationary, analysts at Natixis report.

Key quotes

“Inflation is zero in Japan except in exceptional circumstances: very sharp depreciation of the yen (2013), VAT hike (April 2014, October 2019).”

“The lack of inflation in Japan is surprising because many mechanisms should have driven up inflation in the country. Population ageing without immigration, the energy crisis following the Fukushima disaster, the fact that Japan is a closed economy that imports little from emerging countries and the low productivity in services.”

“The reason why there is no inflation in Japan is that the dominant factor in determining inflation is the functioning of the labour market. The skewing of income distribution against wage earners in Japan and the weak growth in wages and unit labour costs have kept inflation at zero.”

“The United States and the eurozone would therefore need a labour market functioning that is more favourable for employees for inflation to return. That is possible: in the United States, for example, President Biden wants to raise the federal minimum wage from 7.25 to 15 dollars an hour.”