There is growing concern about the Japanese economy returning to deflation. The government and the Bank of Japan should closely watch price trends and implement appropriate policy management.
The April consumer price index, excluding perishable foods, fell 0.2% from a year earlier. This was the first time the index fell in three years and four months.
Crude oil prices plummeted due to a drop in global demand caused by the spread of the new coronavirus, leading to lower gasoline and electricity costs. Fees for accommodations and package tours abroad, among other items, also fell due to people refraining from going out and restrictions on travel overseas.
Although economic activities are resuming, the recovery of demand in the service industry, such as for accommodations and eating out, is expected to take some time. The central bank estimates the inflation rate will be in negative territory in fiscal 2020.
Deflation is a continuous decline in the prices of goods and services. People tend to think that lower prices are better for their lives, but lower prices have a bigger negative impact on the overall economy. It is necessary to be on guard against deflation.
Consumers think that "prices will continue to drop" and postpone purchases. Products do not sell and production decreases. Companies' performance deteriorates and workers' wages fall. If such a negative chain reaction takes place, it will be difficult to break out of it.
Deflation in Japan started in the late 1990s and worsened after the collapse of Lehman Brothers in 2008. It was recognized in the government's monthly economic report in November 2009. But the government judged that the domestic economy was "not in a deflationary state" in December 2013 after Prime Minister Shinzo Abe launched his second Cabinet.
Returning to deflation should be avoided.
The important thing is to protect employment. Those who have lost their jobs due to their companies going bankrupt or for other reasons are hesitant to buy products because of their reduced incomes. If the number of unemployed people soars due to a series of bankruptcies of small and midsize companies, that would put downward pressure on prices. It is important to support financing for small and midsize companies.
As part of its economic measures, the government has begun to provide cash benefits and virtually interest-free and no-collateral loans to small and midsize companies. It also increased the amount of employment adjustment subsidies to companies that did not fire workers but put them on leave.
However, due to complicated procedures and congestion at the relevant offices, the provision of cash benefits and loans has been delayed. The government should do its utmost to ensure that these measures have an effect as soon as possible.
The central bank has established a new program worth 30 trillion yen to provide funds to financial institutions that extend loans to small and midsize firms. It also plans to apply interest rates to current accounts that financial institutions hold at the central bank, depending on their outstanding balance. The program will be beneficial to financial institutions that use it, and provide them with support. It is hoped that the central bank will consider expanding the program.
In the long run, the government's growth strategy to draw out the vigor of the private sector is indispensable. It is desirable to shore up prices by encouraging the creation of services and technological innovation that support a "new way of life."
-- The original Japanese article appeared in The Yomiuri Shimbun on June 4, 2020.
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