Deflation a Real Risk for Japan, Former BOJ Economy Chief Says
Deflation a Real Risk for Japan, Former BOJ Economy Chief Says
(Bloomberg) -- The coronavirus pandemic and plunging oil prices could pull Japan back down into deflation and the Bank of Japan is powerless to fight it, says its former chief economist.
“The BOJ must seriously consider the risk of a return to deflation,” Hideo Hayakawa, who ran the bank’s economic research from 2001 to 2007, said in an interview Friday. “Inflation can easily fall below zero with the impact of oil” and other things.
Analysts are now forecasting a deep recession for Japan, but a return to deflation could mean something more damaging and long-lasting. Prime Minister Shinzo Abe and BOJ Governor Haruhiko Kuroda have been fighting for years to end a negative cycle of weakness in prices, wages and growth.
Hayakawa isn’t the only one who sees a dire outlook for Japan’s prices. Analysts at BNP Paribas SA last week said they expect the BOJ’s main gauge of inflation, prices of goods other than fresh food, to go negative in April for the first time since 2016. They forecast the index falling to around -1% by year’s end.
Japan’s wage growth has been sluggish despite a shrinking workforce that’s kept the job market tight. But with the virus now threatening employment and profits at businesses across the economy, wage gains are even less likely. That jeopardizes a key support for prices, Hayakawa said.
“I thought Japan’s structural issues would keep the labor market tight, but this virus shock is huge,” he said. “Now I just don’t see where inflation can come from.”
Core inflation slowed to 0.6% in February. With the recent plunge in oil prices to the lowest level since the early 2000s, the gauge is likely to fall lower quickly. Wednesday’s BOJ Tankan survey showed inflation expectations at Japanese companies have already dropped to a record low.
Hayakawa said the BOJ should skip quarterly projections for economic growth and prices at this month’s meeting, just as the Federal Reserve did in March. The situation now is too unpredictable to allow for meaningful forecasts, he said.
When the BOJ does deliver its next projections, market participants will probably look more closely at them than usual because the bank’s three-year forecast period now extends to the end of Kuroda’s term in spring 2023. Any prediction of inflation running far below the BOJ’s 2% target would likely be seen as an admission that the governor’s massive stimulus campaign has failed.
Hayakawa said he doesn’t see the BOJ adding any real stimulus at the April 27-28 meeting. With interest rates already negative and asset purchases worth more than Japan’s gross domestic product, the BOJ doesn’t have much ammunition left.
“It’s too bad we’re facing this coronavirus with monetary policy that’s basically dead,” he said.
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