In delivering its semiannual status report to the International Monetary Fund’s leadership, Japan Saturday included a warning to Europe based on its own experience: don’t wait too long to react to any tendency toward deflation.
Deputy Prime Minister Taro Aso said although there are stronger signs of economic recovery in Europe, “the risk of deflation should continue to be carefully monitored.”
Japan “experienced a protracted period of deflation in recent years” and is only during the last four quarters has pulled itself into positive growth with inflation expectations rising, he said in his statement prepared for delivery to the International Monetary and Financial Committee, the IMF’s steering committee.
“We are also making steady progress toward achieving the 2 percent price stability target,” he said, with an annual inflation rate now up to 1.3%.
“Based on our experience, once a deflationary mindset takes hold, it is easy to fall into a vicious cycle, whereby people start to postpone consumption and investment, leading to further deflationary pressures,” he cautioned. The lesson has been, “It is desirable to implement aggressive macroeconomic policies before the economy falls into deflation.”
The official said Japan is indeed “vigorously implementing structural reforms in a wide range of areas, such as energy, agriculture and healthcare.” That is the area included in the “third arrow” category of Abenomics, the revitalization plan of Prime Minister Shinzo Abe, that U.S. Treasury Secretary Jack Lew just a few days ago said is lagging but yet is vitally necessary for sustained progress.
He also warned that the tapering of the Federal Reserve’s asset purchases, while “basically welcomed,” can have an outsized effect on emerging market economies where a large current account deficit and high inflation have created vulnerabilities. Those difficulties “should continue to be properly addressed.”