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Bank of Japan Sees Deflation Risk

Deflation worries are nothing new to Japanese financial authorities.

Past efforts to combat deflation include massive stimulus programs and even participation in the nation's stock market.

The following excerpt is from the June 2019 Elliott Wave Theorist:

The Bank of Japan was the first central bank to buy stocks outright. In 2002-2004 and again in 2009-2010, it bought relatively small amounts of stock, specifically shares owned by troubled Japanese banks. Incredibly, it was a slight net seller of stocks in 2008, right along with the rest of the crowd during that year's bear market. Then the BOJ made the dubious decision that buying and holding stocks was some sort of anti-deflation, pro-economy, monetary-easing policy. Accordingly, it has been buying stocks and stock-market-related derivatives non-stop since 2010. An article in the Financial Times from August reports, "According to one brokerage calculation, the BoJ has become a top-10 shareholder in about 70 per cent of shares in the Tokyo Stock Exchange first section." The bank bought a record ¥6 trillion worth of stock-oriented Exchange-Traded Funds (ETFs) in 2018 and has pledged to continue buying them at that pace. At year's end, it owned nearly ¥30 trillion worth of exchange-traded funds.

Yet, despite anti-deflation efforts, worries persist.

Here's an excerpt from a June 24 Japan Times article:

Some Bank of Japan policymakers voiced concern at a meeting last week that the coronavirus pandemic could tip the country back into deflation, a summary of opinions released Wednesday showed.

A return to deflation would be "a considerable obstacle" to eventually achieving the central bank's 2 percent price stability target, one of the nine Policy Board members said during the June 15-16 meeting.

"Thus, considering this risk, it is necessary to conduct additional easing at this point," the member said.

The central bank maintained monetary policy unchanged at the meeting, keeping short-term interest rates at minus 0.1 percent while guiding long-term rates to around zero percent.

Another policymaker was also worried about the country's tepid inflation, saying, "In the conduct of economic measures, it is necessary first of all to minimize the risk of deflation taking hold."

Japan's core consumer prices fell for a second straight month in May, down 0.2 percent from a year earlier, as the global spread of COVID-19 lowered the cost of energy and accommodation, the Ministry of Internal Affairs and Communications said Friday.

"The increasing number of bankruptcies of firms as well as suspension and discontinuation of businesses may have a negative impact on employment, prices and finance," one policymaker said, adding "it is necessary to be vigilant so that the economy will not fall into deflation again."