Bold new policy frameworks have failed to break long-standing habits
make fun of macroeconomics. But any theory that must explain both Argentina and Japan deserves sympathy. Why, in particular, is inflation so stubbornly high in one and low in the other? In Argentina, consumer prices were 50% higher in February than a year earlier, the fastest increase since 1991. In Japan over the same period, inflation was less than 0.2%, equalling the lowest rate since 2016.
Policymakers in both countries have tried hard to make them macroeconomically “normal”. After Shinzo Abe became Japan’s prime minister in 2012, the central bank promised to raise inflation to 2% in about two years by expanding its asset purchases. And after Mauricio Macri won Argentina’s presidency at the end of 2015, the central bank promised to raise interest rates enough to bring inflation down below 17% in 2017 and 12% in 2018, paving the way for an inflation target of 5% thereafter.
But the early optimism has faltered. Both governments have been forced to revisit their targets and their instruments for achieving them. When price pressures proved more stubborn than Argentina expected in 2017, the government relaxed its unachievable inflation targets to bring them closer in line with reality. But that tweak led investors to lose faith in the authorities’ resolve to tackle rising prices.
The sorry track records of each central bank also diminish their influence over wage negotiations. In both countries, workers demand that their pay keeps pace with the price pressures they feel, not the inflation the central bank promises. During the spring, Japan’s big companies and unions thrash out wage deals that set a benchmark for other parts of the economy. Companies like Panasonic, Hitachi and Toshiba have this year offered increases in base pay of only 0.
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