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INTERNATIONAL > Ukraine Crisis

A crisis triggered by the expectation of a stronger yen

  • June 1, 2022
  • , Chuokoron , pp. 84-91
  • JMH Translation

By Iida Yasuyuki, professor at Meiji University


Iida was born in Tokyo in 1975. He graduated from the Faculty of Economics at the University of Tokyo and withdrew from the doctoral course of the university’s Graduate School of Economics after earning credits. He specializes in macroeconomics and economic policy, and is a member of the Regulatory Reform Promotion Council of the Cabinet Office.


The use of public money


Judging from the consumer price index, Japan is currently far from inflation. Also, the rate of increase in the price index for companies and manufacturers for whom imports make up a large share stood at 9.7%, far below the 31.4% recorded in the euro zone and not substantially different from the 10.3% marked in the U.S. (All figures are as of February and compared with the same month last year.) These facts also explain that the yen’s depreciation is not the major cause of the increase in the corporate goods price. The challenge for the Japanese economy is how to minimize the shrinkage of the domestic economy to deal with the rise in resource prices, which is beyond Japan’s control.  


The jump in costs should be simply reflected in selling prices to prevent the burden caused by higher costs from placing downward pressure on labor costs at companies. In other words, it is necessary to make it easy for companies to raise prices. The ongoing monetary easing, specifically the maintenance of long-term interest rates at low levels, needs to continue until an increase in the inflation rate of domestic products becomes evident.


The government requires considerable courage to steadily advance inflation policies amid the current situation because no one likes such policies.


But if Japan allows the revival of the demon of deflation by prioritizing pleasing voters in the short term, it will cause long-term damage to the Japanese economy more than the coronavirus shock or the war in Ukraine. 


However, monetary policy should not be the only way to support demand for domestic products. Fiscal policy is also an important method. What should be the targets of government spending? We need to look at items whose prices are currently rising, namely, petroleum, gas, and wheat. The government is strongly involved in the price formation of these items.  


Also, the ongoing increase in subsidies for oil wholesalers and the application of the trigger clause to the provisional tax rate of gasoline, which is strongly demanded by lawmakers across party lines, are major candidates [to receive public money]. Further, the government can reduce electricity prices by more than 10% by financing or suspending a levy on the promotion of power generation by renewable energy sources. It is needless to say that public money can be used for wheat, whose price is principally determined by the government. The government should not be frugal with financial resources intended to control these individual prices.


Nuclear power and coal power


The recent shock reminded the world of the danger of being dependent on imports for the majority of energy and on a small number of energy suppliers in certain regions. Now countries around the world are seeking to change their energy policies and this throws a spotlight on nuclear power and coal power. Europe’s commitment to renewable energy sources is based on the assumption of a stable supply of natural gas from Russia as the baseload electricity source. Japan should also take seriously the fact that renewable energy sources are not baseload electricity sources and change its energy policy.


The first thing to be considered is the resumption of nuclear power plants. Only public opinion prevents nuclear power plants whose safety has been confirmed under stricter standards from restarting. Public opinion is also changing in response to the recent hike in electricity prices. The top priority should be given [to the resumption of nuclear power plants] as it is a policy tool that can be implemented without monetary resources.


Fresh attention should also be given to the fact that the energy efficiency of Japan’s coal-fired power generation is extremely high. The total amount of CO2 emissions can be reduced by replacing outdated thermal power stations with advanced coal-fired power plants. Further, coal has a low geopolitical risk as regions of its production are dispersed. The construction of coal-fired power plants will become a major candidate for public expenditure not only in the short term but also in the medium term. We should also remember that the rising global attention to the geopolitical risk to energy supply is a good opportunity to introduce Japan’s coal-fired power plants to Europe, which will be forced to resume coal-fired power plants, as well as to emerging and medium-developed economies.


There is nothing the Japanese government can do directly for the current rise in resource prices. What should be prioritized are measures to keep the shrinkage of the domestic economy to a minimum. That requires public expenditures. Also, public expenditures intended to deal with the current crisis are not only a short-term economic support measure but are also significant as an investment to enhance the capability to deal with a crisis that might be repeated. Japan, rather than fear the immediate financial burden of spending public money, must actively undertake public expenditure from concern about its destabilization in the future. (Abridged)

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