How Japan should tackle deflation

In the second of AsianInvestor's forecasts for the lunar new year, we predict that Japan will miss its inflation target and assess what prime minister Shinzo Abe should do to defeat deflation.
How Japan should tackle deflation

AsianInvestor’s editorial team set out this month to ask and answer 10 key questions for the Year of the Monkey, having consulted a range of industry experts.

Here we present our response to question number two, with the other answers so far listed at the end of the article. The feature will appear in full in the forthcoming (February) issue of the magazine.

Will Japan hit Shinzo Abe’s inflation target in 2016?
Answer: No 

Many commentators agree that Shinzo Abe’s administration has set the wrong inflation target (2%) because it includes oil. Headline inflation stands at 0.3%. Take out food and energy and it would be 1.3% – still a big increase after decades of deflation.


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Technically deflation has ended in Japan. The labour market is tightening and has been for years on account of the declining working age population. Wages are finally rising, albeit slowly, and unemployment is at 3%, a 20-year low.

Of course, no one could have foreseen a 75% plunge in oil to below $30 a barrel (Brent crude) when Abe set his target in April 2013. A low oil price is good for Japan as an energy importer, but not for achieving an inflation target that includes energy.

The government has pledged to do whatever it can to raise inflation, but in truth is not doing much to make it happen. He needs to do more.

The market is anticipating a fresh round of quantitative easing in the second half of this year amid China’s continued slowdown (East Asia accounts for 50% of Japanese exports). In theory, this will drive liquidity and bank lending, enabling companies to push through investment and extra hiring.

Japanese investors are conservative, though. Listed companies hold an average 44% of assets in cash, versus 18% in the US and 20% in the UK, according to JP Morgan. Moreover, market volatility is causing companies to put new spending on hold.

The government must be more supportive, providing tax incentives to put reserve cash to work and providing stricter guidelines for companies to distribute their earnings. That would be a proactive way to help Japan defeat deflation.

Other predictions so far:

Will the US Federal Reserve raise rates in 2016?


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