EDITORIAL: Slaying deflation

The Japanese economy is recovering at a faster pace than previously expected, with consumer prices likely to start rising slightly in fiscal 2011, the Bank of Japan has said.

In its latest Outlook for Economic Activity and Prices, released Friday, the central bank indicated deflation in Japan is unlikely to get worse in the coming years.

Surging exports to emerging countries have been the main contributor to the healing of Japan's feeble economy.

But it is still unclear how the Japanese economy can return to a path of healthy expansion.

That's why the BOJ announced a new policy to help private sector financial institutions increase their supply of funds to growth areas. This is probably the best the BOJ can do to support the nation's economic growth as the central bank.

We welcome the BOJ's commitment to promote the nation's economic health.

It would be even better if the central bank goes one step further in its initiative and proposes to the government a comprehensive package of policy measures to lift the economy out of deflation and enhance its growth potential.

Prices may actually stop falling next fiscal year, as the BOJ says.

But that would not be as encouraging as it sounds, since prices have plunged during the recession triggered by the collapse of U.S. investment bank Lehman Brothers in 2008.

A modest rebound from the decline won't mean an end to the deflationary trend that has been in place for about a decade.

Prices were back on an upward trajectory in the second half of the 2000s, thanks mainly to a growth of exports and capital investment driven by economic bubbles in the United States and other parts of the world.

When the bubbles burst, the world economy was pushed into a synchronized recession, and Japan slid back into a deflationary trap.

The BOJ has also made some misguided moves in responding to the economic situation. One of the most notable mistakes was its decision to terminate its zero-interest rate policy in 2000, when the Japanese economy was still under the grip of deflation.

It should be noted, however, that Japan has failed to wriggle out of the deflationary hole despite years of massive debt-financed government spending and extremely low interest rates. This means the deflationary woes should be blamed on structural problems unique to the Japanese economy as well as on the fallout from the global financial crisis.

There is no sense of security about the future among Japanese, while the nation's population keeps aging amid a low birthrate.

Struggling to remain competitive in globalized markets, Japanese companies are shifting production overseas. Deep pessimism about the future inevitably cramps investment and consumer spending.

These days, some people are even arguing that the BOJ should underwrite long-term government bonds to help remove the deflationary pressure weighing down the economy. But a big dose of morphine will not cure a patient suffering from a chronic illness.

The BOJ should keep interest rates at their extremely low levels as long as the economy remains mired in deflation.

But slaying deflation requires the growth of household spending and corporate investment. There are a number of things the government can and should do to stimulate consumption and investment.

The government should not be allowed to shift the responsibility to the central bank.

If it wants to restore price stability and brighten the nation's economic outlook, the BOJ should not hesitate to announce its own proposals about the strategy the government should adopt to end deflation and stoke growth.

This might invite criticism that the BOJ is meddling in government policy.

But cooperation between the government and the central bank can be strengthened if the two sides engage in constructive debate in a way that doesn't undermine the division of roles between them.

--The Asahi Shimbun, May 1