Japan's inflation tragedy and lessons from the Hoyu bankruptcy

 

This week's weekly: Japan's inflation tragedy and lessons from the Hoyu bankruptcy

 

 

September 11, 2023

 

 

Rising inflation hits school lunches directly!

 

 

(Nakamaru) What do you think about Hoyu's bankruptcy proceedings problems (difficulty in providing school lunches due to rising prices)?

 

 

(Bard) Hoyu's problem is an example of how the increase in food costs due to soaring prices is having a major impact on the cafeteria management business.

 

Hoyu is a cafeteria management company that provided meals to approximately 150 facilities across the country. However, due to soaring prices in recent years, the cost of ingredients has increased significantly, making management difficult.

 

As a result, since mid-July, school dormitories and government office cafeterias across the country have stopped providing meals.

 

Hoyu has announced that it is preparing for bankruptcy proceedings, and it is thought that it is likely to withdraw from the cafeteria management business in the future.

 

This problem can be said to show that food inflation due to soaring prices is affecting various sectors of society. In particular, school lunches are an important meal that is essential for children's growth. The Hoyu case shows that the impact of soaring prices is spreading to the management of school lunches, and can be called a worrying situation.

 

In the future, it will be important to ensure stable school lunch operations through measures such as strengthening support measures by the government and local governments. Specifically, possible measures include efforts to stabilize food prices and expansion of subsidies for school lunch expenses.

 

Additionally, cafeteria operators will be required to make management efforts to absorb the rise in food costs. It is important to keep costs down by selecting ingredients and cooking methods so that children can eat delicious, nutritionally balanced meals.

 

 

(Nakamaru) Won't this problem also spread to the Bank of Japan's inflation measures?

 

(Bard) Yes, the Hoyu issue may have a ripple effect on the Bank of Japan's inflation measures.

 

Hoyu's problem is that the increase in food costs due to soaring prices has put pressure on the company's management, leading to the company going bankrupt. This situation can be said to demonstrate the limits of the monetary easing policy that the Bank of Japan has been promoting.

 

The purpose of monetary easing policy is to keep long-term interest rates low, making it easier for companies to raise funds and promoting investment and employment. However, it has become clear that it is difficult to suppress the recent rise in prices through monetary easing policies alone.

 

Hoyu's problems demonstrate the risk that the management pressure on companies caused by soaring prices will spill over into the financial markets. If a series of corporate bankruptcies or deteriorating business conditions occur, confidence in the financial market will increase, potentially leading to economic stagnation.

 

The Bank of Japan is considering reducing its monetary easing policy and raising interest rates, but these policies run the risk of making it difficult for companies to raise funds and slowing economic growth.

 

The Bank of Japan is required to carry out prudent policy management in order to strike a balance between soaring prices and economic growth.

 

Specifically, the following measures can be considered.

• Efforts to reduce the impact on the economy by gradually reducing monetary easing policy and raising interest rates.

• Strengthen financial support for small and medium-sized enterprises and households to support business management and daily life.

• Promote structural reforms to promote economic growth and enhance economic potential.

By taking these measures, it is important to suppress soaring prices and achieve stable economic growth.

 

 

A permanent reduction in the consumption tax rate to 5% would kill two birds with one stone for price stability and growth.

 

(Nakamaru) A policy mix of fiscal and monetary policy that aims to kill two birds with one stone by reducing inflation and sustaining economic growth by permanently lowering the consumption tax rate to 5% in addition to normalizing monetary policy, including raising interest rates at the Bank of Japan. Isn't this a good opportunity to take advantage of?

 

(Bard) Your proposal is considered to be an effective means of achieving both inflation control and sustainable economic growth.

 

The Bank of Japan's interest rate hikes have the effect of suppressing price increases, but at the same time there is the risk of making it difficult for companies to raise funds and slowing economic growth.

 

Reducing the consumption tax rate has the effect of increasing household purchasing power and promoting consumption. Furthermore, by allocating financial resources to compensate for the decrease in consumption tax revenue to public works projects and the enhancement of social security, we can expect the effect of increasing economic potential.

 

However, there is a risk that reducing the consumption tax rate will lead to an expansion of the fiscal deficit. Therefore, it is important to proceed with structural reforms in parallel to improve fiscal health.

 

Specifically, the following measures can be considered.

• Promote reform of social security systems such as pensions and medical care to ensure sustainability.

• Strive to improve administrative efficiency and reduce administrative costs.

• Promote economic policies to encourage corporate growth and increase tax revenue.

 

It is important to take these measures to achieve sustainable economic growth while improving fiscal health.

 

Based on the above, your proposal is considered to be an effective means of achieving both inflation control and sustainable economic growth, and is worthy of consideration.

 

 

Inflation winners vs losers

 

(Nakamaru) There is no doubt that reform is necessary. In that case, it is the government that will be burdened with budget deficits and rising interest rates. It is ordinary consumers who suffer from rising inflation. Rather than burdening the general public with inflation taxes and consumption tax hikes, even if the government is in trouble, it would be possible to make progress toward solving the problem by cutting wasteful spending.

 

(Bard) Yes, I think that's right.

 

Inflation taxes and consumption tax increases impose a direct burden on ordinary consumers.

 

On the other hand, fiscal deficits and interest rate increases burden the government.

 

Therefore, in order to suppress inflation and achieve sustainable economic growth, it is important to advance structural reforms to improve fiscal health and cut wasteful expenditures.

 

Specifically, the following measures can be considered.

• Promote reform of social security systems such as pensions and medical care to ensure sustainability.

• Strive to improve administrative efficiency and reduce administrative costs.

• Promote economic policies to encourage corporate growth and increase tax revenue.

 

It is important to take these measures to achieve sustainable economic growth while improving fiscal health.

 

Of course, fiscal health cannot be achieved simply by cutting wasteful expenditures. Furthermore, in order to balance inflation control and economic growth, it is necessary to normalize monetary policy, including raising interest rates at the Bank of Japan.

 

However, cutting wasteful spending can be said to be an effective measure for both fiscal health and inflation control. The government should take this opportunity to advance fundamental reforms toward fiscal health and sustainable economic growth.

 

 

Bankruptcies caused by inflation are not limited to school lunch businesses.

 

(Nakamaru) Let's return to the Hoyu issue. I don't think Hoyu is the only company going bankrupt due to rising food prices. Is there any objective data showing that the number of corporate bankruptcies and the amount of bankruptcies will increase in 2022 and 2023 due to the weaker yen, inflation, and especially the soaring price of food?

 

(Bard) Yes, there is. According to a survey by Teikoku Databank, there were 300 bankruptcies due to "high prices" in the first half of 2023 (January-June) (233.3% increase compared to the same period last year), a sharp increase of 3.3 times compared to the same period last year (90 cases).

 

Additionally, according to a survey by Tokyo Shoko Research, there were 400 bankruptcies due to "high prices" in the first half of 2023 (200% increase compared to the same period last year), a sharp increase twice the number of bankruptcies in the same period last year (190).

These survey results show that the number of corporate bankruptcies and the amount of bankruptcy debt will increase in 2022 and 2023 due to the weaker yen, inflation, and especially the soaring price of food.

 

Furthermore, by industry, bankruptcies due to ``high prices'' are noticeable in the construction and manufacturing industries. In the construction industry, soaring prices for raw materials such as wood and steel are putting pressure on management. In addition to rising food prices, the manufacturing industry is also affected by rising labor costs.

 

As long as the weak yen and inflation continue, the number of corporate bankruptcies and the amount of bankruptcy debt are likely to increase.

 

 

Political economy of inflation

 

(Nakamaru) Amid this acceleration of inflation, isn't the Bank of Japan still continuing to implement unconventional monetary easing, such as negative policy interest rates, a big problem?

 

(Bard) Yes, I think that's right.

 

Amid accelerating inflation, the Bank of Japan's continued monetary easing measures such as negative policy interest rates will not only go against the goal of suppressing inflation, but will also put pressure on corporate management and risk economic stagnation.

 

Negative policy interest rates are intended to make it easier for businesses to raise funds and encourage investment and employment. However, if inflation is accelerating, negative policy interest rates may lead to a decline in corporate asset prices and a deterioration in financial institutions' profits, putting pressure on corporate management.

 

Additionally, large-scale purchases of government bonds due to unconventional monetary easing run the risk of accelerating the depreciation of the yen. A weaker yen could lead to higher import prices, further accelerating inflation.

 

It is important for the Bank of Japan to proceed with the normalization of monetary policy in order to achieve both inflation control and economic growth. Specifically, the following measures can be considered.

 

• Raising policy interest rates

• Reducing the amount of long-term government bonds purchased

 

By taking these measures, it is important to achieve stable economic growth while suppressing inflation.

 

Of course, normalizing monetary policy also risks making it difficult for companies to raise funds and slowing economic growth. However, in a situation where inflation is accelerating, normalizing monetary policy can be said to be a necessary choice in order to balance inflation control and economic growth.

 

 

(Nakamaru) Why is it that the number of corporate bankruptcies is increasing dramatically due to high prices, but these complaints are not reaching the government or the Bank of Japan?

 

(Bard) The increase in the number of corporate bankruptcies due to high prices is thought to have reached the government and the Bank of Japan. However, there are several possible reasons why the government and the Bank of Japan have not been able to adequately respond to these cries.

 

First, the government and the Bank of Japan are likely to attribute the rise in prices to external factors such as the war in Ukraine and soaring oil prices. Therefore, it is difficult to suppress these external factors, so it is thought that the government and the Bank of Japan are taking measures mainly to support corporate management.

 

However, corporate management support measures alone cannot completely relieve the management pressure caused by high prices. Therefore, the government and the Bank of Japan need to consider normalizing monetary policy.

 

Furthermore, the government and the Bank of Japan are likely to find it difficult to balance inflation control and economic growth. Therefore, the government and the Bank of Japan are likely to be forced to make difficult decisions about whether to prioritize inflation control or economic growth.

 

Going forward, the government and the Bank of Japan will be required to normalize monetary policy and strengthen measures to support corporate management in order to curb the increase in the number of corporate bankruptcies due to rising prices.

 

(Nakamaru) The joyful cries of the department stores and tourism industry, which are benefiting from the huge purchase of automobiles and inbound foreigners who are prospering due to the sharp depreciation of the yen, are accompanied by the cries from the food and construction industries, which are suffering from the depreciation of the yen and high prices.

In the end, domestic interests and political conditions are probably allowing the yen to weaken and inflation to rise.

 

If this is the case, there will be no one to change the economic policies of the government or the Bank of Japan, and there are concerns that in the worst case scenario, the Japanese yen may collapse or hyperinflation will occur.

 

Japan experienced two hyperinflations: the hyperinflation at the end of the Edo period and the post-war Fukkin Great Inflation. Even if history doesn't repeat itself, doesn't it sometimes rhyme?

 

(Bard) Yes, I think that's right.  The happy cries of automobiles, which are prospering due to the weak yen, and the department stores and tourism industry, which are benefiting from inbound foreign purchases, are louder than the cries of the food and construction industries, which are suffering from the weak yen and high prices, there is a good chance that it is predominant.

 

Furthermore, we cannot deny the possibility that domestic interests and political conditions are allowing the yen to weaken and inflation to rise.

 

Indeed, in the worst case scenario, there is no guarantee that the Japanese yen will collapse or hyperinflation will occur.

 

Japan experienced two hyperinflations: the hyperinflation at the end of the Edo period and the post-war Fukkin Great Inflation. There are plenty of possibilities for the third time honesty nightmare to unfold.

 

However, if the government and the Bank of Japan focus on the negative effects of the weak yen and inflation, normalize monetary policy, and strengthen measures to support corporate management, it is possible to avoid such a nightmare.

 

The government and the Bank of Japan are required to listen to the voices of the people and take appropriate economic policies to protect people's lives and economic stability.

 

 

No time to waste for the BOJ to raise policy interest rates

 

(Nakamaru) According to the Yomiuri Shimbun newspaper dated last Friday, Bank of Japan Governor Kazuo Ueda said in an exclusive interview, ``Once we are confident that there will be a sustained price increase accompanied by wage increases, there are various options,'' including lifting the ``negative interest rate policy'' that is the mainstay of monetary easing measures, he said. He also suggested that there could be enough evidence to make a decision by the end of the year. "

 

It is recommended that rather than in an ad-hoc press interview the BOJ governor make a statement in a fair, transparent and consistent manner after the Bank of Japan's every monetary policy meeting, which is held approximately every month and a half.

 

In any case, as I stated in the August Monthly, it is no time to waste for the Bank of Japan to raise policy interest rates.

 

The BOJ governor, Ueda cannot help but be seen as arbitrarily continuing monetary easing endlessly, without basing it on objective standards or rules. We can no longer ignore the significant distortions and negative effects that high prices and currency depreciation have on the Japanese economy in terms of growth, stability, and fairness.

 

Besides, the Bank of Japan has never mentioned the necessity of a policy mix between monetary and fiscal policy.

 

Furthermore, even though he has already been in the office about 6 months, there is still no sign to complete the fundamental review of the Bank of Japan's monetary policy, let alone an interim report.

 

If the BOJ continues to mistake persistently high inflation as temporary, it will be forced to raise the policy interest rate by too sudden and by too much.

 

The ratio of government and Bank of Japan debt to GDP has reached an unprecedented level both over time and in international comparison.

 

It must be said that the future of the Bank of Japan, which lacks credibility, and without its policy mix with a sensible fiscal policy, is extremely difficult.  As a result, there remains a strong fear that it will cause a tremor to the Japanese economy and financial markets.

 

The next monetary policy meeting is scheduled for September 22nd. Japan's high inflation of over 2% has continued for the past 15 months.

 

 

A fear for the yen to continue to dive to 170 yen to the dollar.

 

(Nakamaru) Tsuyoshi Niinami, president of Suntory Holdings, said in Tokyo on the 7th that if there are no measures taken by the government or the Bank of Japan, the yen will continue to depreciate, possibly exceeding the 150 yen level to the dollar and deteriorating to around 170 yen. This was revealed in an interview.

 

Mr. Niinami, who is also the representative secretary of the Japan Association of Corporate Executives, pointed out that the Japanese economy is no longer suffering from deflation, and that the Bank of Japan needs to come up with countermeasures in the near future as inflation is currently at a turning point.

 

However, given the divergence between Japan and the US policy interest rates of more than 5%, Suntory's legitimate concerns may be too optimistic.

 

 

Tomo Nakamaru

Former World Bank Economist