EDITORIAL: The return of deflation

The government declared Friday that the Japanese economy has been caught by deflation again.

In assessing the current health of the nation's economy in its monthly economic report for November, the government said, "Judging from a comprehensive analysis of price trends, the economy is in a mild deflationary phase."

It was the first time in three years and five months that the government officially recognized a downward price trend as deflation.

Deflation means a continued general decline in prices in the face of depressed demand and oversupply. It puts enormous downward pressure on sales, production and consumer spending.

Japan became the first industrial country to fall into deflation in the postwar era as consumer prices fell for an extended period following the collapse of the bubble economy in the early 1990s.

In March 2001, the government declared the economy to be in deflation and held onto that view until June 2006. Over a long period of time, falling prices were sapping the vigor of the economy.

As the economy regained strength, deflationary pressure eased. But the government avoided declaring an end to deflation, recognizing the possibility of the economy slipping back into a deflationary downturn.

The economic contraction precipitated by the global recession has forced the government to acknowledge that the deflationary trend is accelerating.

Consumer prices have fallen for seven months in a row. The domestic demand deflator, a measure of price levels excluding the cost of imports included in gross domestic product statistics, dropped in all of the first three quarters of the year.

The latest economic outlook by the Organization for Economic Cooperation and Development said Japan is in the grip of deflation and will remain so until 2011. All of this makes the government's decision to acknowledge deflation reasonable.

Some people, including those in the financial sector, say this acknowledgement will create the expectation among people that prices will be lower tomorrow. This, they warn, will encourage consumers to delay purchases, further depressing demand.

However, rather than worry about the negative effects of the declaration, we must recognize the reality of deflation--which could prolong the current economic downturn--and work out a remedy for the disease.

In a Friday news conference, Deputy Prime Minister Naoto Kan, who is also in charge of economic and fiscal policy, called on the Bank of Japan to take steps to slay deflation. But the government needs to work with the central bank to ensure every possible policy measure will be taken to arrest the economy's deflationary descent.

As it turned out, the most effective cure for the deflation triggered by the burst of financial market and real estate bubbles was expansion of exports driven by robust economic growth in the United States and China. Surging exports prompted companies to ramp up investment in plants and equipment and lifted corporate earnings.

The government should buckle down to develop and execute a growth strategy designed to stimulate investment and consumption in the private sector.

The strategy should focus on measures to bolster the welfare sector of the economy and create jobs in line with the pledge by the administration of Prime Minister Yukio Hatoyama to shift the policy priority from investment in roads and buildings to investment in human resources under the slogan of "From concrete to people."

Another important component should be a set of efforts to promote "green economy" as a means to stem global warming.

Last week, visiting OECD Secretary-General Angel Gurria said Japan needs to pursue economic growth by expanding the role of women in society and promoting development of new environmental technologies.

Japanese policymakers should respond positively to Gurria's ideas.

--The Asahi Shimbun, Nov. 21(IHT/Asahi: November 23,2009)