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HOME NRI JOURNAL Takahide Kiuchi's View - Insight into World Economic Trends :
What does it mean to “exit deflation”?

NRI JOURNAL

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Takahide Kiuchi's View - Insight into World Economic Trends :
What does it mean to “exit deflation”?

Takahide Kiuchi, Executive Economist, Financial Technology Solution Division

Dec. 12, 2017

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What is deflation? What does it mean to “exit deflation”? The fact that these have been positioned as important policy objectives without properly being defined is likely to cause confusion in the future.

The probability of a “deflation exit declaration” is low

The Council on Economic and Fiscal Policy, held on November 16, found that the four indices that had been used to decide whether or not the country was exiting deflation had all flipped to positive. Following this, the Cabinet Office declared that the trend had shifted towards an exit from deflation. This led to predictions, in some fields, that the government would soon announce a “deflation exit declaration,” or that this would pave the way for the normalization of the Bank of Japan’s financial policies.
In actuality, however, the probability of the government making a “deflation exit declaration” is low. There are, of course, political merits in making such a declaration—they could use it to promote the success of their regime’s financial policies, for instance. The reality, however, is that the majority of Japanese citizens still do not feel the supposed benefits of these financial policies, and that this “deflation exit declaration” could have more of a negative than a positive effect.
It seems as if the government, in establishing “exit deflation” as a slogan, wanted in some ways to evoke an image to unify the country—the government, standing steadfast against an enemy of the people. If this were the case, it is perhaps more advantageous politically for the government not to make such a declaration, and continue to show the people their stance on fighting deflation.

A purposely ambiguous definition of deflation

In this way, the government’s decision to announce trends for deflation seems more like a part of a strategy, one that considers various elements like the Japanese people’s evaluation of the economic climate, as well as the political climate at the time. As such, it is of political benefit for them not to provide a clear definition of deflation, as it allows them to make these decisions in more flexible ways.
However, in the Joint Declaration of the Government and Bank of Japan announced in January 2013, the government and the Bank of Japan have promised to each do what they can to end deflation. The Bank of Japan established a 2% price stability goal, which they hope to achieve with active monetary easing. The government, on the other hand, announced that they would continue their growth strategy and work towards fiscal soundness. This declaration makes it seem as if the Bank of Japan has gotten caught up in the government’s ambiguous definitions, exemplified by the slogan-like nature of “exit deflation,” which is still not properly defined.

Necessity of reevaluating policy coordination between the government and the Bank of Japan

The rate of consumer price inflation stagnates well below 2%. In this kind of situation, what would happen if the government were to announce a “deflation exit declaration”? Unless the Bank of Japan reevaluates their 2% price stability goal, they would need to continue their irregular monetary easing. This kind of stance on policy, however, would not be supported by the government or the people. The policy coordination between the government and the Bank of Japan, as announced in the Joint Declaration of the Government and the Bank of Japan, would fall apart.
As such, we believe it is necessary for there to be a reevaluation of the Joint Declaration of the Government and the Bank of Japan, which defines the nature of their policy coordination. During this reevaluation, it is important also that they clarify in concrete terms what kind of policies will help improve the people’s satisfaction with their lives (instead of undefined, ambiguous goals like “exit deflation”), which institution will take responsibility for these policies, and more.

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Nomura Research Institute, Ltd.
Corporate Communications Department
E-mail: kouhou@nri.co.jp

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