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- "Cheap Japan" through the lens of the Big Mac
The direct causes of "cheap Japan" is long-term stagnation in prices and depreciation of the Japanese Yen.
Japan has faced stubbornly low inflation since the late 1990s. As the following CPI graph shows, Japan’s CPI has remained generally flat since the late 1990s, which is a significantly different scenario than in the United States or the eurozone, where prices have risen at an annual average rate of around 2%. Since 2021, the world has been hit by rising prices, and in Japan, the consumer price inflation rate exceeded 4% from the previous year for the first time in 40 years. However, compared to other countries, the inflation rate in Japan has still not been overwhelmingly high. The persistence of low inflation is likely to have created a strong expectation that prices will remain unchanged, thereby strengthening price stickiness. For example, prices for Big Macs have not risen in Japan compared with overseas locations.
A "cheap Japan" itself may not be a big problem. If the same products can be produced cheaper in Japan, it should be possible to increase exports to other countries. Moreover, if Japan has the technological capability to produce goods and services at lower cost, and if workers are paid a wage commensurate with their productivity, then low prices will increase the consumer’s purchasing power and improve people’s economic welfare. Low prices may also have the advantage of increasing the number of foreign tourists and attracting foreign companies to invest in Japan.
In this sense, the "cheap Japan" phenomenon can be seen as a warning for Japan’s failure to raise productivity and increase income.
1 Nakafuji (2021), Ito (2022), Watanabe (2022), and others.
2 On January 16, 2023, the price increased to ¥450.
3 The calculation of purchasing power parity is affected by the setting of the base period. For calculation methods, see Nagayasu et al. (2015) and other international finance textbooks. Note that although February 1973 is generally used as the base period for calculations, January 1996 is used here to focus on the differences in inflation rates between Japan and other countries since the late 1990s.
4 See below for information on the countries of origin and final processing of the main Big Mac ingredients.
https://www.mcdonalds.co.jp/products/1210/
(References.)
Ito,T. (2022). Why is Japan so cheap? Project Syndicate, 2022.3.3
Nagayasu, J., Esaka, T., and Yoshida, Y. (2015). Hajimete Manabu Kokusai Kinyu Ron [Learning International Finance for the First Time]. Yuhikaku.
Nakafuji, R. (2021). Cheap Japan: Stagnation indicated by "Price." Nihon Keizai Shimbun Shuppan.
Parsley, D. C., & Wei, S. J. (2007). A prism into the PPP puzzles: The micro-foundations of Big Mac real exchange rates. The Economic Journal, 117(523), 1336-1356.
Watanabe, T. (2022). The Mystery of World Inflation. Kodansha
Please note: The data contained in this report has been obtained and processed from various sources, and its accuracy or safety cannot be guaranteed. The purpose of this publication is to provide information, and the opinions and forecasts contained herein do not solicit the conclusion or termination of any contract.
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山下 大輔
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