Today’s consumer price index data show that “core-core” prices in Japan, that is excluding food and energy, were 1.2 per cent lower in December than a year ago. That is the biggest decline since the series began in 1971 – worse even than the numbers in 2001 when deflation was at the centre of Japan’s economic and political debate.
Yet the Tokyo economics community seems apathetic. The Bank of Japan said and did nothing much at its meeting on Tuesday, despite expecting deflation to persist through 2010 and 2011. Government ministers make pro forma calls on the BoJ to act but old hands say it is nothing like the pressure that went on in 2001.
The FT’s very own Lex column is just as sanguine, saying on Wednesday:
“Moreover, the data do not justify further easing. Deflation is not getting much better, but neither is it getting much worse. The yen is not yet in really critical territory either…Mr Shirakawa is right to stand firm for now.”
I’m surprised. Deflation has had a toxic effect on Japan’s economy for a decade, and here we are, with core-core price declines hitting a new record. Yes, deflation will ease because of higher energy prices, but people should worry because price declines don’t have to get worse from here – they just have to continue – and deflationary expectations will become so entrenched that they are almost impossible to shift.
I can understand the arguments against taking drastic monetary action but not the lack of vigour in the debate. I think it shows how after a decade in deflation or close to it, Japan and its central bank have all but accepted that falling prices are just how it is, and there’s not much to be done about it. It’s an attitude that makes it hard to be optimistic about an end to deflation, and because of the crucial role of expectations, if people are not optimistic then deflation will not end.
