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. "Thus the end of Japanese deflation may be on the horizon," it said, citing a rise in its own index of Japanese inflation in February due largely to higher commodity prices.
ONE-OFFS
A recent poll of economists estimated the nationwide consumer price index (CPI) -- the key measure of price trends, to be released on Friday -- had been 0.1 percent higher in March than a year earlier. But economists say that may be as high as the annual rate of inflation goes, because the gain is more to do with special one-off factors than with reflation of the economy. "Consumer prices in the fiscal year 2003 were pushed up by special factors such as a rise in personal contributions to medical costs, an increase in tobacco tax and a rise in rice prices," said Daisuke Yamazaki, economist at Goldman Sachs. "In fiscal 2004, these will slowly wear off." Adjusted for seasonal patterns, Japanese prices have recently changed little from month to month, but they slumped 0.7 percent in February. Economists note that the CPI for the Tokyo region for April, a leading indicator of price trends one month ahead of nationwide figures and also due to be released on Friday, is forecast to be lower than a year earlier. After April, when the price comparisons with a year earlier fully take into account the one-off factors, nationwide prices will probably return to declines, economists said. Furthermore, a Bank of Japan (BOJ) report next week on the outlook for the Japanese economy and prices will show that BOJ Policy Board members expect mild deflation to continue in the current fiscal year. The Nihon Keizai Shimbun said last week that the report, due on Wednesday, would forecast a fall of around 0.2 percent in the CPI in the year that started on April 1 from the previous year. Rising raw materials prices are also unlikely to have a major impact just yet, with companies prefering to cut costs elsewhere rather than risk passing on the increase to customers. "It will take time for rising raw materials costs to be reflected in higher consumer prices," said Takeshi Minami, economist at Norinchukin Research Institute. ING Securities Chief Economist Richard Jerram sees inflation and inflationary expectations only slowly turning in Japan. He cites a series of indicators that would have to show improvement before the economy could be considered to have reflated, including interest rates on new loans, real estate prices, money supply and housing starts as well as prices. "Although the necessary conditions are falling into place, so far evidence of reflation is largely absent." ($1=108.64 yen)////