No end in sight for Japan's deflation

January 28, 2012

The government is nowhere near to breaking out of a deflationary cycle that has plagued the nation since the Democratic Party of Japan took power in 2009, according to statistics released Jan. 27.

The consumer price index in 2011 was 99.7, a decrease of 0.3 percent from the previous year, according to an announcement from the Internal Affairs and Communications Ministry. It marks the third consecutive year that the CPI was lower than the previous year.

While the dip in 2011 was smaller than the 1.4 percent and 0.7 percent decreases for 2009 and 2010, respectively, the overall deflationary trend continued, with both home appliances prices and hotel rates taking a dive after consumers became more frugal in the aftermath of the Great East Japan Earthquake.

Electricity and gas rates also increased in 2011. The CPI minus energy prices showed a decrease of 1 percent.

The internal affairs ministry also released on Jan. 27 the preliminary figures for Tokyo's 23 wards in January, which showed the CPI had decreased by 0.4 percent, excluding fresh foods, from the same month last year.

With the pace of economic recovery slowing and the rise of consumer prices impeded by a leveling out of energy prices, Taro Saito, a senior researcher at the NLI Research Institute, said, "There is a strong possibility that the (CPI's) rate of decrease will expand after spring."

The central government has estimated in its economic forecast that the CPI for fiscal 2012 would increase by 0.1 percent, moving the economy out of its deflationary rut. The Bank of Japan is also forecasting a similar increase for the CPI excluding fresh food prices.

However, in contrast to the positive forecasts by the government and BOJ, private research organizations are predicting that the CPI will continue to decrease in fiscal 2012.

The administration headed by Prime Minister Yoshihiko Noda is seeking to raise the consumption tax rate in a two-step process from April 2014.

While Motohisa Furukawa, the state minister in charge of economic and fiscal policy, has said all possible policy measures would be implemented to move the economy out of deflation, specific measures for a growth strategy on the part of the government are still lacking.

If deflation is prolonged, that could push back the start of the consumption tax hike.

Yoshiki Shinke, a senior economist at Dai-ichi Life Research Institute, said, "Because the government could face criticism for raising the tax rate when it has yet to overcome deflation, the current economic situation is not conducive to holding discussions on raising the consumption tax rate."

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