Could Japan be heading back into deflation?

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Japan Faces Renewed Risk of Deflation Due to Coronavirus Pandemic

Japan may be heading back into a cycle of falling prices, a phenomenon known as deflation, due to the economic downturn threatened by the coronavirus pandemic. This potential return to deflation would represent a significant setback for Prime Minister Shinzo Abe's "Abenomics" stimulus policies, which aimed to end years of economic stagnation. Analysts point to falling oil costs and the pandemic's impact on consumer demand as key factors contributing to this concern.
Economic Indicators Point to Price Declines

Forecasting models suggest a downward trend in prices is likely to begin soon. Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, anticipates that core consumer prices will start to decrease from April and that the pace of these declines will accelerate towards the end of the year. A Reuters poll of analysts indicated that core consumer prices would see a modest rise of 0.1% in the second and third quarters of 2020, followed by a contraction of 0.4% in the fourth quarter.
Pandemic's Impact on Demand and Wages

The coronavirus pandemic poses a substantial threat to Japan's economic stability, potentially affecting wages, dampening consumption, and leading retailers to consider workforce reductions. Evidence of falling prices is already emerging in certain sectors, with goods such as beef and flowers experiencing price drops. Furthermore, Japan's Manufacturing Purchasing Managers' Index revealed that input prices contracted in March 2020 for the first time since 2016, and output charges saw their steepest decline in three-and-a-half years, reflecting the pass-through of lower raw material costs.
Policymakers Grapple with Limited Options

Japanese policymakers have expressed concern about the possibility of a return to sustained price falls. A government official acknowledged the risk, stating that wage growth cannot be relied upon and the immediate priority is preventing job losses. Analysts are skeptical about Japan's ability to implement stimulus packages comparable to those in other major economies without jeopardizing its public finances. The current government package involves an additional US$149 billion in bond issuance, likely focusing on immediate relief for businesses rather than broad demand stimulation. The Bank of Japan has limited capacity to further expand its bond-buying program, and deepening negative interest rates are a controversial option due to potential harm to financial institutions' profitability.

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Could Japan be heading back into deflation?

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