Government foresees deflation end even though prices are still falling

Bloomberg

The government has forecast an end to deflation even after a report this week showed the economy is still struggling to shake off more than a decade of falling prices.

The gross domestic product deflator, the nation’s broadest gauge of price trends, will rise 0.2 percent in the year ending in March 2014, the Cabinet Office said in a report Friday, the first increase in 16 years. The world’s third-largest economy is forecast to grow a nominal 1.9 percent, exceeding a 1.7 percent expansion in real terms.

The forecast contrasts with a second-quarter GDP report, released Monday, that showed the deflator falling 1.1 percent from a year earlier. Price declines have sapped the momentum of the economy and prompted lawmakers to call for more aggressive monetary easing by the Bank of Japan.

“I doubt we will see progress toward ending deflation,” said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute Inc. in Tokyo. “These are more like targets rather than forecasts.”

The government is trying to sustain the nation’s recovery after the Great East Japan Earthquake caused massive tsunami devastation in the Tohoku region in March 2011.

“I hope to see an end to deflation as soon as possible,” economic and fiscal policy minister Motohisa Furukawa told reporters on Friday. “We expect the economy to continue a solid expansion.”

Separately, the Finance Ministry said it will cap new bond sales at ¥44 trillion ($554 billion) next year and reduce public works spending by 10 percent as it attempts to slow the expansion of the world’s largest public debt burden.

The government also plans to limit general spending, excluding debt interest payments, to ¥71 trillion for the year starting April 1, according to budget guidelines approved by the Cabinet on Friday. The ceilings are the same as the ones set for this year’s budget.

“Japan’s fiscal conditions are worsening seriously and if we leave this problem as it is, concerns about the country’s fiscal sustainability will mount and may cause extremely adverse effects on the economy and the Japanese people’s life,” the guideline said.