From Breakingviews - Japan’s economic scars might blind it to inflation
The BOJ recognised the problem as early as 1987 but officials were rattled by the Black Monday stock market crash in the United States. They waited two years to act. When the central bank officials began belatedly raising rates, they set off a collapse in land prices comparable to the U.S. Great Depression in the 1930s. Economist Richard Koo estimated falling values erased 1,500 trillion yen of national wealth, the equivalent of three years of GDP.
The threat of a demand-driven inflationary spiral still seems far-fetched in a slow-growing, fast-aging nation where cash-hoarding has been reflexive. Since Japan’s bubble popped, attempts to pull back on fiscal spending, hike consumption taxes or lift borrowing costs have proven ill-advised. Hiking benchmark interest rates in 2000 was disastrous – long term lending rates actually fell in response, and the decision had to be reversed.
The risks are clear. In 2021 and 2022, central bankers in the United States and Europe disregarded signs prices were getting out of hand until very late in the game, with less excuse than the Japanese. The resulting steep rise in interest rates - since March 2022 the Fed has yanked its target to a range of 5% to 5.25% from 0.25% to 0.5% - whipsawed securities markets and caused bank failures in the United States.
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