[2024 Financial Forum] "Japan's Chances of Escaping Deflation Increase"

Takako Masai, CEO of SBI Economic Research Institute

Masai Takako, CEO of SBI Economic Research Institute, is delivering the keynote speech on the theme "The Puzzle of Deflation: Strategies for Economic Recovery" at the '2024 Asia Financial Forum' held on the 9th at the Chosun Hotel in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

Masai Takako, CEO of Japan's SBI Economic Research Institute, stated, "Japan is increasingly likely to completely escape deflation (a decline in prices during an economic downturn)."

Masai, a former member of the Bank of Japan (BOJ) Policy Board, delivered a keynote speech on the morning of the 9th at the Westin Chosun Hotel in Jung-gu, Seoul, at the 13th Asia Financial Forum under the theme "The Secret to the Revival of the Japanese Stock Market, Awakening Japanese Economy," saying, "However, a more long-term perspective is necessary."

He advised, "Achieving the 2% inflation target does not mean the end," adding, "We need to consider what changes might occur over the next 5 to 10 years." He continued, "We will not return to the society without deflation as it was in 1990," and said, "With various new phenomena such as digital transformation (DX) and low birthrate and aging population, the overall environment including the economy and social structure will change anew."

Japan Sees an Exit from Deflation

Japan's long-term deflation, known as the "Lost 30 Years," is coming to an end. In particular, Japan's representative stock index, the Nikkei, has continued to rise, surpassing 40,000 yen, leading to positive outlooks for the Japanese economy. Masai analyzed Japan's deflation situation, financial policies, and medium- to long-term challenges on this day. He explained that although it is called the Lost 30 Years, the Japanese economy steadily grew in its own way, and later BOJ's negative interest rate policy contributed to escaping deflation.

Masai said, "Japan sees an exit from deflation, but there is no particular secret." He emphasized, "Rather, it is the result of persistent discussions and efforts by the government, companies, and citizens during the Lost 30 Years."

Masai pointed out that nominal wages and prices in Japan had been stagnant. He mentioned that in the U.S., prices for goods and services such as lodging and haircuts doubled over 20 years, but prices in Japan have not risen. He stated, "Some people think it is good that prices do not rise, but ultimately, what has been eroded over 30 years is workers' wages."

He said, "To overcome various constraints of deflation, the wages of workers were ultimately sacrificed," adding, "However, the growth secured by suppressing citizens' wages was not satisfactory compared to other countries, and escaping deflation is very important when considering long-term welfare and well-being of the people."

He continued, "Twenty-five years ago, in 1998, general prices turned negative year-on-year, and the adverse effects of deflation became a serious concern. Land prices did not rise, and prices remained flat, but because there were positive effects close to daily life, such as buying goods cheaply, deflation prolonged and the current economic structure was formed."

Masai said, "Because of this, people remained unaware of the adverse effects of deflation. Japan experienced a 10% year-on-year price decline even during the Meiji era. Compared to that, deflation proceeded loosely and this state became entrenched over 30 years," adding, "From a policy perspective, the only option Japan could pursue was economic stimulus through fiscal and monetary policies." According to Masai, the BOJ implemented economic measures 13 times over 11 years.

Masai Takako, CEO of SBI Economic Research Institute, is delivering the keynote speech on the theme "The Enigma of Deflation: Strategies for Economic Recovery" at the '2024 Asia Financial Forum' held on the 9th at the Chosun Hotel in Jung-gu, Seoul. Photo by Jinhyung Kang aymsdream@

Negative Interest Rate Implementation... Changing Companies

He mentioned Japan's zero interest rate policy that lasted for 10 years, saying, "There were various causes such as earthquakes, but the result was not good." Masai explained, "When deflation prolongs, companies do not hire, wages do not rise, and household consumption and housing investment are suppressed. Due to worsening corporate profits, demand stagnation, and falling asset prices, loans do not proceed, and non-performing loans increase, causing Japan to struggle in a vicious cycle."

It was only in 2013 that the government and BOJ issued a "Joint Statement" declaring an escape from deflation. They started quantitative and qualitative monetary easing policies, and from 2014 to 2016, introduced negative interest rates. Masai explained that at the time, there were many critical opinions about negative interest rates in the financial sector and society, but it caused a significant social reaction, even becoming a "buzzword award" candidate.

Masai said, "There were criticisms suggesting it would be better to just stop, and financial institutions were harshly critical because negative interest rates were introduced," adding, "I thought a humble attitude and communication were important to gain understanding, and I believed that without escaping deflation, the economy could not be driven."

He continued, "After gaining understanding that such policies were necessary, prices that had not budged began to rise due to external pressures such as energy price increases and imports, and Japanese companies that had hardly raised prices started to increase them."

Masai compared consumer price indices of the U.S. and Japan to explain the background that allowed a change in the framework of financial policy. He said that prices of goods and services hardly fluctuated near zero. He added, "Japan imports energy, so when energy prices rise, prices of goods are affected and rise, but still, there was no significant long-term movement. Recently, prices have exceeded the BOJ's 2% policy target, and this situation was strong evidence when considering a second negative interest rate policy."

Masai emphasized, "Prices have become an environment where escaping deflation is possible, including through risk asset purchases, but Japan's financial policy aiming for complete escape from deflation is not simply about raising or lowering interest rates," adding, "I believe we have come this far through a long struggle."