Japan’s mind-bending bento-box economics
For much of the past three decades Japan’s economy has been defined by deflation, stagnation and fading global relevance. That is no longer the case. Between 1991 and 2021 Japan’s annual inflation rate averaged 0.35%. Inflation has been above 2% every month since April 2022. In March the Bank of Japan (BoJ) raised rates for the first time in 17 years, doing away with the world’s last experiment in negative interest rates; it will debate another rise at its next meeting at the end of this month. The blue-chip Nikkei stock index broke its bubble-era high this February; the Topix, a broader benchmark index, hit its highest level since 1990 last week. It seems that the lost decades are over.
But what comes next? Some see opportunity. Japan, the optimists crow, is back—this time for real. Morgan Stanley, a bank, touts a “revitalised Japan”. Higher inflation and more dynamic companies will put the country back on a growth trajectory, allowing it to keep its public debt in check and hang on to its place among the world’s top economies. Japan has become a destination for high-tech firms seeking to reinforce supply chains: TSMC, the Taiwanese semiconductor giant, is pouring billions of dollars into new manufacturing plants.
Others take a gloomier view. Some argue that after three straight quarters of contraction or no growth, Japan has already fallen into mild stagflation. Long-term potential growth remains low, the yen is in freefall and demographic headwinds loom. Pessimists fret that Japan’s future is as a middling economy with burdensome debt, a weak currency and a greying workforce.
The implications of the new era can be seen in Nihonbashi, a neighbourhood in Tokyo’s north-east. Its fate has long moved in parallel with that of the national economy. During the Edo era (between 1603 and 1868), merchants congregated there, making it the country’s commercial centre; during the Meiji period (1868-1912), when Japan opened up to the world, it became home to the first institutions of modern finance. Highways built above Nihonbashi’s bridge in 1963 symbolised the country’s booming growth in the decades after the second world war; shuttered stores along Nihonbashi’s avenues attested to the bursting of the asset bubble in the 1990s.
Today, the neighbourhood offers a window on Japan’s new economic reality. Start at Benmatsu Souhonten, which bills itself as Japan’s oldest continuous purveyor of bento, or boxed lunches, with a history that stretches back to before America’s “black ships” arrived to open Japan to foreign trade. More recently the soaring cost of imports caused by the pandemic and the war in Ukraine have acted as a black ship of sorts. What was once unimaginable has become commonplace: companies consistently raise prices and consumers keep coming back. Benmatsu Souhonten has increased bento prices twice in the past two years. “These days customers understand prices go up,” says Higuchi Junichi, the shop’s eighth-generation owner.
It is a change that officials inside the Bank of Japan, down the street from Benmatsu Souhonten, have spent years trying to engineer, to little effect. While central banks elsewhere raised rates in response to rising inflation, the BoJ did nothing, hoping to use the external shocks to re-anchor domestic expectations for inflation near its 2% target. The strategy appears to be working. Prices for a wider swathe of goods are rising at faster rates than at any time since the 1990s (see chart). Expectations have risen and stayed up: the BoJ’s latest Tankan survey on corporate sentiment, released on July 1st, shows that firms expect inflation of 2% or higher five years into the future.
Price growth has helped push firms to raise wages, too. Annual negotiations, known as shunto, have produced big salary increases for two years running. This year’s average nominal wage growth will exceed 5% for the first time since 1991. The trend is likely to continue, thanks to demographic and generational changes. As Japan’s working-age population shrinks, the competition for talent is heating up. Changing jobs was once seen as taboo; young Japanese today have fewer qualms about that.
Strong wage growth is a big reason why the BoJ normalised its policy in March. Though the bank has maintained a relatively accommodating stance (its policy rate stands between 0% and 0.1%), analysts expect at least one more rise this year. Goldman Sachs, a bank, estimates that the BoJ policy rate will gradually increase to 1.5% by 2027. The implications of rising prices and, potentially, rising rates are vast. They will force executives to “think about changing their business model—not only about their prices, but about the mix of goods, about efficiency, about strategy itself”, says Okina Yuri, chair of the Japan Research Institute, a think-tank.
Such pressure, along with gradual improvements in corporate governance, is fuelling optimism at the Japan Stock Exchange, just south of Nihonbashi’s bridge. As far as the market is concerned, “we have already passed the turning point”, says Yamaji Hiromi, the bourse’s boss. “Many are convinced that Japan is now different.” Many corporate leaders are shifting from cost cutting to investment-driven growth. Piling up cash makes less sense in an inflationary environment. “It’s a totally different mindset,” Mr Yamaji says.
Some Japanese households are also starting to put their savings to work. NISA, a new government programme to encourage retail investing by offering exemptions from capital-gains taxes, has been a hit since its launch in January. Younger Japanese, who did not experience the trauma of the bubble bursting, have proved especially keen. Nearly ¥7trn ($44bn) flowed into NISA accounts in the first four months of this year; roughly half of the funds are being invested in domestic markets. “It takes a generation to recover from a bad bubble burst,” Mr Yamaji says.
Yet for all the investor enthusiasm, the mood among Japanese consumers is gloomy. At the top of a department store in Nihonbashi last month Kasai Hidekazu, a retired schoolteacher, munched on a bento. “It sure doesn’t feel like the situation is getting better,” he mused. Wage growth still lags behind inflation, meaning pay cuts for many Japanese in real terms. Consumption is sluggish. In the boutiques that fill the floors below, many shoppers are foreign tourists who have been arriving in droves, lured in part by Japan’s relative cheapness. The yen’s exchange rate, against a basket of currencies and adjusted for inflation, is at a historic low. Germany recently surpassed Japan as the third-largest economy in the world, measured in current dollars.
The BoJ hopes wages will start growing in real terms later this year, once the results of this spring’s wage negotiations filter through to salaries. That should encourage consumer spending. But Japanese consumers, conditioned by decades of deflation, may not behave as the economic textbooks predict. “It’s so expensive now,” Mr Kasai says. “It makes me think I’d rather save some money.”
Ultimately, the demographic pressure that has helped tighten labour markets also drags down growth. Japan’s working-age population (now 74m) is projected to shrink by 30m between 2020 and 2070. For all Japan’s improvements, its potential growth rate is still below 1%.
These dynamics can be seen at the shops and cafés that line the shotengai, or market street, in Ningyocho, on Nihonbashi’s eastern edge. “There are just fewer and fewer people,” laments Masukawa Yoshio, the head of the local business association. His café has gone from being open six days a week to five, for lack of staff. He is unsure who may take over when he retires. Yet as he looks towards the future, he feels hope, despite all the challenges. “Everything was very stagnant,” he says. “At least now there’s movement.” ■