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End to Japan Deflation?


While a burgeoning economic recovery has spurred talk of an end to Japan's five-year bout of falling prices, economists and ministers are not rushing just yet to declare that deflation is over.

Amid the congratulatory back-slapping over the global recovery at the recent meeting of finance chiefs of Group of Seven industrialised nations, Japanese officials were quick to point out it would take time to fix the problem.

"The road to achieving stable prices, of bringing the year-on-year change in consumer prices to above zero, will not be easy," Bank of Japan (BOJ) Governor Toshihiko Fukui said after the G7 meeting.

With growth firming and currency markets stable, deflation has moved to centre stage in Japan's economic policy debate. Price falls have crimped companies' profits and made banks' bad loan burdens heavier, slowing the progress of the recovery.

The problem has also led the Bank of Japan into a monetary policy that has flooded the financial system with as much as 35 trillion yen ($322 billion), more than it needs on any typical day, in the hope that banks will lend the cash to companies, thereby kick-starting economic activity.

Activity is certainly picking up, with recent surveys of corporate sentiment showing firms more optimistic than they had been in years, new investment rising and consumers showing signs of spending again.

Imports also rose in March, indicating increased domestic demand, while the prices of raw materials such as metals and oil on world markets are also bringing inflationary pressure.

"Japanese inflation pressures remain subdued, but have been edging higher in recent months," the Economic Cycle Research Institute, a U.S.-based private research body, said in its April report...