In Japan, They’re Still Worried About Deflation, Not Inflation
Central bank girds for further fight against falling prices and says it might reduce interest rates further into negative territory
The Bank of Japan dropped its annual target for stock purchases Friday as they showed little power to lift the broader economy.Photo: issei kato/Reuters
TOKYO—A restaurant chain just made its fried-chicken meal about 50 cents cheaper. A Uniqlo shirt costs a dollar or two less as of this month. And home-products maker Muji slashed the price of a storage box by 35%.
In Japan, the world’s deflation champion, America’s talk about inflation heating up is a “fire on a distant shore,” as the Japanese saying goes. Despite eight years of spending trillions of dollars to perk up the economy, the central bank is still digging in for a lengthy further battle with falling prices.
Prices excluding fresh food fell 0.4% in February compared with a year earlier, the government said Friday just as Bank of Japan policy board members were gathering to discuss again how to get the nation’s consumers and lenders into a more spirited mood.
Their answer, for now, was more fine-tuning. The central bank said it might lower its short-term interest rate to minus 0.2% or further from minus 0.1% now, and it laid out a path for doing so without hitting commercial banks’ profitability. It also said it would give incentives to boost lending.
“We will continue powerful monetary easing patiently to achieve our 2% inflation target,” said Gov. Haruhiko Kuroda.
Japan has been struggling with deflation for more than two decades. While price cuts look good to consumers, steadily falling overall prices can lead to a negative cycle of low corporate investment and sluggish wages.
The Japanese lesson has sunk in with central bankers around the world. Federal Reserve Chairman Jerome Powell reiterated Wednesday that inflation would have to exceed 2% for a sustained period before the Fed would raise interest rates.
He mostly shrugged off concerns from some economists that the $1.9 trillion economic program just passed by Congress plus a wave of pent-up demand could trigger sharper price rises in the U.S. Yields on 10-year Treasury notes topped 1.7% on Thursday, up from 1.1% in early February.
Mr. Powell was trying to keep the U.S. from falling into what the Bank of Japan described Friday as Japan’s “complex and sticky” deflationary mind-set, in which people expect prices will never rise and companies act accordingly.
That mind-set has proved impervious to some forces that would normally nudge prices up. Japan’s stock market this year reached a 30-year high, with help from a Bank of Japan stock-buying program that was meant to encourage risk-taking behavior. Yet in a country where most people don’t own shares, the windfall from more-valuable stock portfolios isn’t translating into a willingness to splurge on higher-priced items.
“ ‘It wouldn’t be surprising if we don’t reach 2% inflation for another 10 or 20 years.’ ”
— Kazuo Momma, economist at Mizuho Research Institute
With the stock purchases showing little power to lift the broader economy, the Bank of Japan on Friday dropped its annual purchase target, which had stood at the equivalent of $55 billion since 2016. It said it reserved the right to buy more shares if needed.
Some economists said they didn’t expect much inflation even after the coronavirus pandemic eases and people can shop and travel again as they did before 2020.
“To win that demand and compete with rivals, companies are unlikely to carry out price increases,” said Kazuo Momma, an economist at Mizuho Research Institute who formerly served as a BOJ executive director in charge of monetary policy. “It wouldn’t be surprising if we don’t reach 2% inflation for another 10 or 20 years.”
Some companies have been cutting prices to encourage customers to shop and dine out.
Fast Retailing Co. lowered prices of all items sold at its Uniqlo clothing stores in Japan by about 9% on March 12, saying that people are experiencing “unprecedented difficulties because of the coronavirus pandemic.” It was the first time the company cut prices of all Uniqlo products.
This month restaurant chain Ootoya Holdings Co. reduced the price of its signature homestyle set meal, which comes with deep-fried chicken and pumpkin croquettes, by about 50 cents to the equivalent of $6.80. Ootoya’s same-store sales dropped nearly 30% in February during a state of emergency that expires Sunday.
Economists say consumers will likely remain cautious about spending because companies shaken by the pandemic are hesitant to raise wages. Also, Japan’s vaccination program is moving slowly. Seniors are supposed to start getting vaccines in April, while much of the rest of the population is likely to wait until the summer or fall.
Still, Takeshi Niinami, chief executive of Suntory Holdings Ltd. and a member of the government’s economic council, said he thought pent-up demand could begin to kick in next quarter. “There is a growing appetite for spending,” he said. |
