The Bank of Japan’s efforts to encourage price increases across the Japanese economy have failed to produce the desired results. The ‘goal’ of a 1% increase in the CPI in Japan is now appearing to be a far more long-term expectation than originally desired by the Japanese government as the try to shake the economy out of nearly ’20 years of deflationary pressure.’ As the BOJ considers the purchase of 10 trillion yen in additional assets as a form of easing, officials at the Bank have blamed the downgraded inflation expectations on the appearance of fresh negative issues such as slowing production levels in China as its economy finally begins to feel the full impact of the global recession. This all plays out in the context of a stronger yen acting as a ‘brake’ on exports, a crucial segment of the Japanese economy (WSJ link below).
The problem of deflation in the Japanese economy is hardly a new one, as shown by the BOJ’s own statistics (link below). Since 2006, the CPI (Laspeyres chain index less fresh food) in Japan has only reached positive numbers five times, and then only for a brief six to seven month spurt only for gains to be almost wiped out by dips of equal weight in the opposite direction. The most extreme instance took place in 2008 when the CPI increased by 1% to 2% over the year to be followed by a 2.5% drop the very next fiscal year. The impact of a stronger yen on Japan’s already depressed exports to China (see ‘More Bad News for Japan’s Auto Industry’ blog entry) could be very negative.
In addition to all of this, the poor numbers have revealed a ‘rare display’ of intense division between the BOJ and the Japanese government as officials criticize the Bank for not being clear enough on its inflationary goals. The government itself is also in a state of disharmony, as Prime Minister Noda’s administration may be ‘left without cash as soon as next month’ as a legislative stalemate in the Diet holds up progress on an economic stimulus package (see Bloomberg link below).