Bloomberg: Japan Buries Cherished Economic Ideas

Japan’s economy defies traditional economic theories. High debt and full employment have not led to inflation; the Bank of Japan is resigned that policies won’t achieve a 2 percent inflation target. “Basic econ theory says that as the labor market gets tighter, competition should push up wages, which will then boost consumer prices via increased demand and higher costs,” writes Noah Smith for Bloomberg. “In Japan, nothing of the sort has happened.” Smith concludes that economists may not understand how inflation works: “Macroeconomists have been thinking about inflation for decades, but no real progress has been made in understanding where it comes from or how to produce it with policy.” An aging population curtails growth, but gross domestic product among the employed is growing. Higher inflation eases debt repayments, but low interest rates and rising tax receipts help with that challenge, though the government may be forced to keep interest rates low for the long term. An economic boom with low inflation, bringing price stability, is not the biggest problem for a nation. The rest of the world may look to Japan for coping with aging populations. – YaleGlobal