RIETI Report April 2018

How Far Have We Come in the Fight against Deflation? Credit squeeze risk has all but vanished

The deflation that has been cited as the root cause of Japan's economic stagnation over the past 20 years or so is coming to a close due to external factors such as the global economic recovery since the financial crisis in 2008, a series of monetary easing measures, and the ensuing weakness of the yen. Furthermore, Abenomics is succeeding in terms of arresting the price downtrend. On the other hand, CPI growth still remains lower than the inflation target of 2% adopted by the Bank of Japan (BOJ), thus lingering doubts exist as to whether Japan has yet to fully overcome deflation. In the April issue of the RIETI Report, we present "How Far Have We Come in the Fight against Deflation? Credit squeeze risk has all but vanished" by Faculty Fellow Kaoru Hosono.

Hosono first explains why deflation is evil as it negatively affects the real economy because there is a floor below which the nominal interest rate cannot fall, thereby potentially leading to shrinking exports and capital investments, as well as a credit crunch. He then discusses the inherent problems with the BOJ's inflation targeting of 2% along with the side effects and risks involved in continuing the monetary easing policy. Finally, Hosono suggests some relevant measures to take, drawing from his research studies, emphasizing that the government should renew its commitment to the fiscal consolidation target and the BOJ change its monetary policy approach.

This month's featured article

How Far Have We Come in the Fight against Deflation? Credit squeeze risk has all but vanished

HOSONO KaoruFaculty Fellow, RIETI

The consumer price index (overall CPI excluding perishables) in October 2017 recorded an 8% year-on-year growth. If deflation is defined as a continuous price decline, the deflation that has been cited as the root cause of Japan's economic stagnation over the past 20 years or so is coming to a close. In addition to external factors such as the global economic recovery since the financial crisis in 2008, a series of monetary easing measures under the Abenomics policy of the Shinzo Abe administration and the ensuing weakness of the yen are contributing to the fight against deflation.

Abenomics, whose goal is overcoming deflation, is succeeding in terms of arresting the price downtrend. On the other hand, the CPI growth still remains lower than the inflation target of 2% adopted by the Bank of Japan (BOJ), thus there exist lingering doubts as to whether Japan has yet to fully overcome deflation. As the BOJ assumes that the CPI growth is likely to reach approximately 2% around FY2019, the central bank has announced its intention to continue expanding the monetary base (money supply) until then.

To read the full text
https://www.rieti.go.jp/en/papers/contribution/hosono/03.html

Event Information

For a complete list of past and upcoming event information.

Symposiums

Workshops

BBL Seminars

Fellow titles and links in the text are as of the date of publication.

For questions or comments regarding RIETI Report, please contact .

RIETI Report is published monthly.