Japan Brief/FPCJ, No. 0973
November 25, 2009


Deflation Returns to Japanese Economy, Government Says

The government of Japan has acknowledged that the country’s economy is in a deflationary state. Its monthly economic report announced on November 20 officially stated that “considering the price trends, the Japanese economy is in a mild deflation,” meaning a prolonged continuous decline of prices over two years or longer as defined by the International Monetary Fund (IMF). It was the first such acknowledgement in three years and five months since June 2006.

As reasons for the judgment, Deputy Prime Minister Naoto Kan, concurrently minister for economic and fiscal policies, cited three factors at a meeting of related ministers on November 20: (1) The consumer price index is in a continuous decline; (2) the economy’s nominal growth rate has come out lower than the real growth rate (adjusted to price changes) for two consecutive quarters; and (3) the supply-demand gap—a deficiency in aggregate demand relative to supply—is widening to the tune of 40 trillion yen per year.

This does not mean, however, that the Japanese economy is already trapped in a deflationary spiral and tumbling. The monthly report for November also said that “the economy as a whole continues to be recovering” with “business capital investment bottoming out.”

The government’s “deflation declaration” came only a few days after the release of the July-September quarter gross domestic product (GDP) statistics (November 16) that showed an annualized real growth rate of 4.8%, representing two consecutive quarters of growth and the highest figure in two and a half years. The growth was supported by increased exports and personal consumption and an upturn in capital investment. However, many observers question whether this will lead to sustainable growth.

Although the real GDP growth rate recorded a positive figure, the GDP growth in nominal terms (that is, unadjusted to price changes) was minus 0.3% at an annualized rate (minus 0.1% from the preceding quarter). It is this negative trend in nominal GDP, which reflects declining prices, that worries the government and industrial circles. The nominal GDP has continued to fall below the previous year’s level for six consecutive quarters.

Falling prices may be welcome to consumers, but a continuous decline of prices depresses sales of businesses and their profits, which in turn will keep unemployment high, wages low, and personal consumption weak, thereby backfiring on business capital investment. The government sees the possibility of such a deflationary spiral as a major risk for the Japanese economy in the foreseeable future. The government is particularly concerned that the high jobless rate, which stood at 5.3% in September (the latest month for which statistics are available), could rise further in the months ahead.

In deciding in a seemingly abrupt manner that the economy is in a “deflationary condition,” Deputy Prime Minister Kan was seen to be tacitly urging the Bank of Japan to be more aggressive in monetary relaxation (Mainichi Shimbun, November 20, evening edition). Kan himself told the Asahi Shimbun that “I thought it necessary to convey my sense of crisis [to the Japanese people and the Bank of Japan]” (November 23).

Underscoring the mood, the Yomiuri Shimbun, in its November 21 editorial, was straightforward in calling on the central bank to “share with the government a sense of crisis.” Criticizing the Bank of Japan, the Yomiuri said, “At a policy board meeting on November 20, however, the central bank decided to keep the current key interest rate unchanged. Bank of Japan Gov. Masaaki Shirakawa suggested additional measures, such as further quantitative easing, are not needed. The central bank appears to lack the government's concern when it comes to deflation.” Other newspapers, such as The Nikkei, Mainichi (November 21), and the Sankei Shimbun (November 22), also argued in their editorials for the central bank’s stronger commitment against deflation.

In a related move, visiting Secretary General Angel Gurria of the Organisation for Economic Cooperation and Development (OECD) told a news conference in Tokyo on November 19 that “the Bank of Japan should fight deflation,” suggesting that Japan should maintain its super-low interest policy until a rise in prices becomes secure. In its latest world economic outlook, the OECD projected Japan’s real economic growth rate in 2010 at 1.8% and forecast a deflationary trend that would persist through 2011 (The Nikkei, November 20).

Major Newspaper Editorials

In its editorial on November 21 The Nikkei questioned the government’s seriousness about the crisis facing the Japanese economy. “Absent from the administration of Prime Minister Yukio Hatoyama is a comprehensive economic policy. It is failing to face up to the problem of deflation,” it warned. Suggesting further deregulation in such potentially high demand sectors as medical services, education, and childcare, The Nikkei recommended, “The first important thing is fiscal action. The government needs to speed up demand creation measures with high economic impact.” It concluded, “A message from the government to shatter the prevailing sense of impasse is essential.”

The Sankei sounded friendlier toward the government. Referring to the November monthly economic report in which the government declared that the economy was in a mild deflation, its November 22 editorial said that “Yukio Hatoyama’s cabinet, which seemed to be lacking a sense of crisis about the Japanese economy, finally appears to be realizing the severe reality.”

Both the Asahi and Mainichi tried not to be too alarmist about deflation. The Asahi in its November 21 editorial counseled, “. . . rather than worry about the negative effects of the declaration, we must recognize the reality of deflation—which could prolong the current economic downturn—and work out a remedy for the disease.” It went on, “The government should buckle down to develop and execute a growth strategy designed to stimulate investment and consumption in the private sector. The strategy should focus on measures to bolster the welfare sector of the economy and create jobs in line with the pledge by the administration of Prime Minister Yukio Hatoyama to shift the policy priority from investment in roads and buildings to investment in human resources under the slogan of ‘From concrete to people.’ Another important component should be a set of efforts to promote ‘green economy’ as a means to stem global warming.”

The Mainichi in its editorial on the same day argued, “We don’t need to be rattled or on guard in the face of the recognition of deflation. What we are seeing at present is the coexistence of a mild economic recovery and deflation; there is no fear of plunging into a depression in which a recession and deflation spirally intensify each other.”

(Copyright 2009 Foreign Press Center, Japan)

*Japan Brief is an original production of the Foreign Press Center, Japan, and does not represent the views of the Government of Japan or of any other body.


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