By Richard Werner

Japan has declared the return of deflation. The country already holds the record for the number of consecutive years of deflation (seven, until 2006). Since its banking problems started after the bursting of the asset bubble of the 1980s, Japanese growth has remained below potential for almost twenty years. The recent financial crisis has not helped: industrial production has crashed and nominal gross domestic product plunged by 7 per cent year-on-year in the first half of 2009. Meanwhile, the yen has soared close to its post-war high of Y79.75 on 19 April 1995 which shocked exporters at the time.

So when the Bank of Japan’s policy board scheduled an emergency meeting at the start of this month, some expected bold measures to stimulate demand, banish deflation and end the recession. The government had raised the stakes as its finance and deputy prime ministers demanded more action from the BoJ, even a return to a policy of ‘quantitative easing‘.