Japan price pressures mounting as firms ditch ‘deflation’ model, says Bank of Japan official

JAPAN may see inflationary pressure build up ahead, as more companies shift away from a business model that worked under a prolonged period of deflation, Bank of Japan board member Seiji Adachi said on Thursday. But he warned that it was premature to tighten monetary policy now, as inflation remains short of the central bank’s 2 per cent target and the economy has yet to fully recover from the Covid-19 pandemic. “With the impact of the pandemic continuing, shifting to tighter monetary policy now would inflict huge damage to business and household activity,” Adachi said in a speech. “It’s premature to move toward tighter policy” with consumer inflation distant from the BOJ’s 2 per cent target, when stripping away the temporary effect of soaring fuel costs, he said. Japan was mired in two decades of deflation after the burst of an asset-inflated bubble in the late 1990s, when weak consumption forced firms to cut prices to lure consumers. That, in turn, led to slow wage growth, giving households less purchasing power. As global commodity prices rise, more companies are raising rates now in a sign they are shifting away from the low-profit business model that worked under periods of deflation, he said. “There’s a good chance Japan’s inflationary pressure will heighten ahead,” said Adachi, who has consistently voted with the majority of the board in keeping policy ultra-loose. Adachi also said the BOJ would not raise interest rates to slow the pace of recent yen declines. “We should not forget that a strong yen was among factors that led to Japan’s prolonged deflation and two ‘lost’ decades” of economic stagnation, he added. REUTERS