Abacus: April's Inflation Fears and 'Japanification'
robert wallis
COVID economic recovery, so innately tied to the public health crisis as it is, has been a test of the Fed’s ability to spur growth through all of their monetary policy tools. Also, with more traditional government bond purchases, in an attempt to increase the money supply and stimulate growth, the central bank has undertaken a massive quantitative-easing campaign. In effect, this means the Fed has been buying long-term securities from the free market to secure these markets and push interest rates lower still. As a result, the Fed’s portfolio of securities grew by nearly $3 trillion throughout 2020. The impact of these policies has moved interest rates to approximately 0, and it appears the rate will stay there for some time. These sustained 0 rates have led many to fear what is known as Japanification. Many of these policies undertaken echo those used by the Fed in response to the 2008 recession, but this time around, there are some key differences.
Throughout the 2008 financial crisis, central banks had difficulty reheating the economy following the near-collapse of financial markets, housing prices, and employment. With consumer confidence so low in financial institutions, the increase in the money supply was unable to spur growth as the money sat in banks instead of being loaned out. It made sense when so many were burned on their mortgages. While the nation eventually dug itself out of the recession after nearly 18 months of decline, the inability of monetary policy to help speed recovery during the crisis spread fear among economists of a phenomenon known as “japanification.”
With an aging population worldwide, along with a declining birth since the early 70’s many economists have seen Japan, which has been fighting that very problem head-on, as a test-tube for other developing economies who are about to encounter a similar issue. Following the technological revolution in the ’80s, saving increased, and there was a lack of consumption, Japan’s economy faced unprecedented low growth. The central banks cut interest rates to spur consumption, but to everyone’s surprise, that did not happen. Even as their population aged and economists assumed that pent-up savings would be released, this has not happened.
The similarities to the US case are there; following separate financial crises, cheap money monetary policies have created sluggish and inconsistent economic growth at best. As our debt continues to balloon due to increased government spending in a similar way to Japan’s, are we not living in an environment where near 0% rates become the norm? In many ways, April’s inflationary uptick serves as a counter to Japanification fears that have run wild over the last three years.
The consumer price index saw its most significant increase since September 2008 this April, climbing 4.2%. The Fed, in many ways, has attributed this growth directly to COVID recovery. As consumption and demand pick back up with business reopening and vaccines widely available, inflation is expected. Further than this, there are “cost-push” influences on inflation are present. With supply chains still crippled from COVID, the high cost of productive inputs pushes firms to raise prices. All the while, the Fed maintaining that they are unconcerned with the implications of inflation. It was an expected side effect of recovery, and for two, inflation has been too low since the 2008 recession. This has direct ties to the fears of Japanification mentioned earlier. The Fed, if anything, is excited by the prospect that their policy, along with the recovery trends, has resulted in an economy once again moving in the right direction.
While these increases have been promoted as temporary as high up as the White House, even the promise of growing inflation in the coming months would if anything, serve to evidence an economy that is back on track even as commodity prices become volatile in the face of inflationary fears. Further, authentic, meaningful inflation that impacts long-run expectations could only really get here once the US economy returns to a relatively full employment mark. The realities of these inflationary trends are anything but troubling, especially once the real drivers of the movement are outlined. One of the most surprising outcomes of the government stimulus checks, meant to help increase consumption, was the staggering increase in demand for used cars and trucks. The nearly $2k handed out to citizens was, in many cases was spent on used cars around $5-$10 thousand. When evaluating the individual drivers of the CPI, it becomes clear that the inflation that has scared investors is in many ways industry-specific. Used cars have accounted for almost 10% of the increase in the CPI relative to other goods. This is the case, along with a price increase for hotels and auto rentals, goods that have seen flat-lining demand in the face of limited travel. In the end, it appears that both inflation fears and those of Japanification are overblown.
With interest rates poised to stay near 0, economists have expressed their fears that our developed economy will see stagnating growth with no room for corrections via monetary policy. In Japan, where even quantitative easing measures have proven ineffective while ballooning the national debt, these fears have been realized. While the current recessionary period in the US is tied directly to a public health crisis, the signs point to the fact that this new monetary policy, which places quantitative easing in tandem with government spending above all else, is still effective in combating recessions. While it is not my place to decide whether the Fed’s policy or the vaccination campaign is more responsible for economic recovery up until this point, it is fair to say that inflation fears are overblown. If anything, long-term inflation above 2%, a figure that has been constant for nearly ten years now, could be positive in combating so-called “Japanification” as a sign of growth.
