Japan Economics Roadmap to End Deflation: Glimmers of Light on a Rocky Road
Main message: We now see a roadmap for ending deflation. Patience remains the byword until 2013, but we also see scenarios for faster, or slower, than expected progress depending on policy.
What’s new: In addition to projecting the trajectory for underlying inflation (excluding fresh food, energy and institutional factors) from the output gap, we use wages and asset prices to formulate qualitative judgments, but ultimately the outlook remains grim. However, policy still has the potential to alter the path for prices, either
upward or downward.
Policy implications: One means of stimulating prices that interests us is the reflationary policy independent of fiscal expansion. In concrete terms this would mean achieving an inflation target through (1) further monetary accommodation, (2) proactively promoting a weaker yen, and/or (3) taking steps to stimulate asset prices. Supply side reform is also important.
Market implications: If the government and BoJ adopt an inflation target, and if measures for its attainment gain the markets’ trust, we think the year-end forecast of our currency strategy team for ¥109/$ would be more realistic. For TOPIX we continue to look to 1,100, the forecast of our equity strategy team. Even so, we see limited scope for steepening of long-term rates given brisk demand for duration and a return to fiscal
rehabilitation.
Risks: One bull case scenario is the global economy overheating and refueling inflation for primary commodities. Another is an upward shift in the markets’ medium-term inflation expectations due to drastic policy measures by the government/BoJ. Bear case scenarios include a downward shift in households’ and companies’ medium-term inflation expectations, stemming from demographic causes, or the asset market slump spreading its tendrils to general consumer prices as a result of sovereign risk or tighter financial regulations.
Japan Economics Roadmap to End Deflation: Glimmers of Light on a Rocky Road
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