Bank of Japan Gov. Haruhiko Kuroda emphasizes the need to reverse people’s “deflation mindset” for inflation in Japan to reach the central bank’s annual 2 percent target — which he declared would be achieved in two years when the BOJ embarked on his “unprecedented” monetary easing in 2013 as a key component of the Abe administration’s bid to bust deflation, but now he concedes may be out of reach during his five-year tenure. However, he does not seem to give an answer on how specifically that mindset can be changed.
If the BOJ’s scenario was that consumption will rise and prices go up by spreading inflationary expectations among the public and pumping more money into the economy, things do not appear to have worked as simple as that. The consumer price index, which marked a 1.5 percent year-on-year rise in April 2014, has hovered in the negative territory for the recent seven months in a row to September as household spending remains weak.
In pushing back the 2 percent inflation target once again to “around fiscal 2018” last week, Kuroda said it’s not easy to dispel the deflation mindset — which he appears to view as a mentality embedded among consumers and businesses as a result of the deflation that gripped the nation since the 1990s to anticipate prices to fall and, based on that expectation, hesitate to spend or invest more. He acknowledged it was “regrettable” that the target could not be reached in two years, although he lays the blame chiefly on the global slowdowns in emerging economies and the steep fall in crude oil prices.
Price and consumption statistics point to intensifying deflationary sentiments. The nationwide consumer prices excluding perishables in September fell 0.5 percent from a year ago for the seventh month of decline in a row. Even the index on prices not including food and energy stopped rising for the first time since the same month three years ago. Consumer spending per household in September fell 2.1 percent in real terms for the seventh consecutive monthly decline.
Employment data continues to improve. The jobless rate in September fell to 3.0 percent, and the ratio of job offers to job seekers hit 1.38 — the highest in more than 25 years. Gains in people’s wages have finally outpaced price increases this year, with September seeing a 0.9 percent net wage increase for the eighth monthly rise in a row. Still, consumers’ restraint in their spending remains strong, and moves are afoot in the retail and food industries to cut their prices to avert decline in sales. Both consumers and businesses appear hesitant to spend or invest out of concern over the economy’s prospect.
Tapped by Prime Minister Shinzo Abe to lead the BOJ in 2013, Kuroda has injected a massive amount of money into the markets through the central bank’s purchase of assets such as government bonds. True, the nation’s monetary base — which he pledged to increase by ¥80 trillion annually — hit a record ¥417.6 trillion at the end of last month, a 21.3 percent rise from a year ago. While Kuroda changed the yardstick of the monetary policy adjustments from monetary base to long-term interest rates at the BOJ’s policy meeting in September, it is expected the supply of money by the central bank will continue to expand.
Still, inflation today is either anemic or stuck in the minus territory as growth of the economy remains weak and uneven. There are growing doubts as to whether Kuroda’s 2 percent annual inflation target would be achieved for the foreseeable future — whether or not he would be reappointed to the job as BOJ chief when his five-year term ends in April 2018. Questions persist over the effects of monetary easing alone to boost prices.
Of course the BOJ cannot be entirely responsible for the state of the economy. Abenomics has been noted for its heavy dependence on the central bank’s monetary policy while little has been achieved by the administration in terms of structural reforms to generate new sources of growth. As Kuroda reportedly noted earlier this year, a central bank policy is no panacea for Japan’s economic problems.
But laying the blame on the mindset of consumers and businesses also sounds too simplistic. No matter how the central bank or the government try to fan inflationary expectations, consumers will hesitate to spend more if their wages are not increasing enough and they don’t see their future income rising. Companies will not be investing more unless they see new and increasing demand in their market. While the Abe administration likes to tout pay raises by Japanese firms under its watch as the sharpest in years, people’s wages on a net basis declined for four years in a row to 2015 — until they begun to pick up in recent months, partly as falls in prices have deepened. There are views that decline in wages since the 1990s was chiefly to blame for the protracted deflation in this country. If the mindset of consumers and business management is indeed the problem, you will have to tackle what’s behind the mentality.