Japan’s Economy Minister Insists Deflation To Be Kept at Bay

(Bloomberg) -- Japan’s government and central bank are united in their determination to stop the country sliding back into a negative cycle of falling prices and stagnation, according to economy minister Yasutoshi Nishimura.

At the same time, Japan must brace for more economic pain as the major urban areas of Tokyo and Osaka are likely to remain under a state of emergency at least until the end of May, said Nishimura, who also leads the government’s virus response.

“We share with the Bank of Japan a firm determination that we will absolutely not allow deflation to return,” Nishimura said in an interview Wednesday. “We also share a strong sense of crisis as we work together to deal with the current situation.”

Japan has seen the fewest confirmed Covid-19 infections and related deaths of any Group of Seven leading democracy and Nishimura said the government is looking to end its national state of emergency at the end of this month. “Even if we do remove it, we will restore things gradually. It won’t mean that everything is immediately freed up.”

Nishimura’s emphasis on the need to avoid a reemergence of deflation as the pandemic triggers a cratering of global demand suggests more policy action could be in the works. It comes after senior government officials had notably refrained from referring to the BOJ’s 2% inflation goal.

Government experts are expected to advise on Thursday which regions of the country can start to resume more activities. Japan’s capital has been the worst-hit by the virus, with about 5,000 cases confirmed. It now looks to be emerging from the crisis, with about 10 new infections set to be announced Wednesday, according to news network JNN -- the lowest figure since late March.

“It’s going to be difficult to lift the state of emergency in Tokyo tomorrow. So with urban areas still in a severe situation, we need to be prepared for a substantial downturn,” Nishimura said.

Keeping the economic powerhouses of Tokyo and Osaka under virus restrictions would show the government prioritizing management of the health crisis over the economy after criticism that its response to the pandemic has been slow and insufficient.

Nishimura also said it was too early for Japan to start talking about loosening border restrictions, as some of its neighbors are doing.

Japanese households cut monthly spending by the most in five years in March, as the virus spread. Adding to the gloomy news, Japan’s biggest automaker, Toyota Motor Corp., warned this week that profit will fall 80% to a 9-year low as consumers hold off on major purchases.

Debt Burden

The immediate focus of policy makers is to keep companies afloat and workers employed while containing the virus. But concerns are building that the likelihood of the worst economic contraction since World War II in the current quarter -- combined with rock-bottom oil prices -- could push Japan back into the deflation hole it has spent years trying to escape.

Economists surveyed by Bloomberg this month expect the economy to shrink at an annualized pace of 22% in the current quarter, while the BOJ sees inflation averaging as low as -0.7% over the 12 months to March 2021.

The question remains about how much Japan can do with the world’s largest public debt burden and few monetary tools left following more than seven years of unprecedented monetary easing. The central bank has already bought a mountain of assets that is bigger than the entire economy as part of its campaign to slay deflation.

Fears that other countries may also succumb to the stagnation seen in Japan in the past have generated much talk of the need to avoid the Japanification of economies globally.

In an unusual move, Nishimura has attended two BOJ policy meetings since March, asking the bank to continue to take appropriate policy by closely watching economic developments. The BOJ more than doubled its purchase of corporate bonds and promised to buy bonds without a limit at its April gathering.

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