Deflation Risk Generating Growing Concern at Bank of Japan

Bank of Japan board members are increasingly concerned that Japan could slip back into deflation, according to a summary of viewpoints from the April policy meeting.

Deflation featured three times in the opinion summary, compared with no mention of the word in March. As recently as the January meeting, when the huge scale of the coronavirus pandemic was unknown, one member was still ruling out any return of deflation.

Falling back into a hard-to-escape cycle of falling prices and feeble economic growth would be a huge setback for the BOJ and the administration of Prime Minister Shinzo Abe after seven years of massive monetary easing to stimulate inflation. That campaign has left the BOJ with little remaining ammunition and a balance sheet of assets bigger than the entire economy.

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The Abe government is unlikely to put pressure on the central bank to act solely on prices amid the widespread economic devastation of the coronavirus pandemic. Still, some members flagged the need to work in tandem with the government to avoid deflation’s re-emergence.

“Given the current situation where there is concern that the economy might fall into deflation, fiscal and monetary authorities can further cooperate with each other regarding their policies,” one member said, according to the summary.

At the gathering, the board projected its key inflation gauge, which excludes fresh foods, will go down to as low as -0.7% this fiscal year ending in March 2021. The board essentially acknowledged that the BOJ won’t hit its 2% price target by the end of Governor Haruhiko Kuroda’s term in April 2023.

The apparent lack of hesitation to use the word deflation is a fresh reminder of the bank’s different approach to communications under Kuroda. Under the governorship of his predecessor, Masaaki Shirakawa, the BOJ had intensive discussions on using the word and avoiding scope for any misinterpretations.

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