Will Japan slip back into deflation due to the pandemic?

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Japan Faces Renewed Deflationary Risks Amidst Pandemic Economic Shock

Consumer prices in Tokyo have fallen for the first time in three years, and national factory activity has slumped significantly, raising concerns that the coronavirus pandemic could push Japan back into a period of deflation. This economic downturn is the sharpest in over a decade, with analysts forecasting a substantial contraction in gross domestic product for the current quarter.
Tokyo Consumer Prices Decline for First Time in Three Years

In April, core consumer prices in Tokyo experienced a year-on-year decline of 0.1 per cent. This marks the first such decrease since April 2017, falling short of expectations for a slight rise and reversing the 0.4 per cent increase observed in March. The primary driver for this price drop has been the significant decrease in energy costs, a direct consequence of the global collapse in crude oil prices. This trend consolidates expectations that falling consumer prices will continue in the coming months as the pandemic's economic impact intensifies.
National Factory Activity Shrinks at Fastest Pace in Over a Decade

A separate business survey has confirmed a severe contraction in Japan's factory activity during April. The pace of this shrinkage is the fastest recorded in over ten years, indicating that the coronavirus pandemic has severely impacted both industrial output and new orders. This widespread slump in manufacturing underscores the broad economic challenges facing the nation.
Economic Contraction and Household Spending Weakness Projected

Analysts are anticipating a considerable economic contraction for the current quarter, potentially exceeding the 17.8 per cent decline seen in the first quarter of 2009 during the global financial crisis. The median forecast for Japan's April-June gross domestic product (GDP) projects a 22.0 per cent fall. This bleak outlook is further supported by projections for household spending, which is expected to show a 6.7 per cent decline in March compared to the previous year, signalling a significant drop in domestic consumption.
Policy Response and Deflationary Concerns

In response to the deteriorating economic conditions, the Bank of Japan has already boosted its monetary stimulus measures, pledging to inject more funds into the economy. Minutes from the Bank of Japan's March policy meeting revealed concerns among board members regarding a potential cash squeeze for small businesses, a rise in unemployment, and a slowdown in business investment. Economy Minister Yasutoshi Nishimura has stated that the government will collaborate with the central bank to prevent Japan from slipping back into deflation, an economic condition the country struggled with for nearly two decades until 2013.

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Will Japan slip back into deflation due to the pandemic?

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