Such Fear of a return of deflation is growing in Japan. Consumer prices excluding the strongly fluctuating food and energy prices fell in October by 0.7 percent compared to the same month last year and thus more sharply than in over ten years, as the government data published on Friday showed.
The last time there was such a sharp decline was in March 2011. Deflation is a price decline on a broad front that can trigger a downward spiral of falling sales, wages and investments – with devastating consequences for the economy.
The Japanese central bank is actually aiming for an inflation rate of around two percent. Economists assume, however, that consumer prices will continue to fall in the coming months due to sluggish consumption.
The corona crisis is dampening the joy of buying among the Japanese, which is why many companies and businesses are trying to stimulate demand with price discounts.
“Even if you disregard special factors, the trend in consumer prices is weak,” said Dai-ichi Life Research’s chief economist, Yoshiki Shinke, referring to the risks posed by a resurgence of the pandemic. “If restrictions on dining and travel are reintroduced, Japan’s fragile economic recovery could fail.”
Part of the decline can be explained by the fact that the government raised VAT from eight to ten percent last year. In addition, she started a discount campaign for domestic travel to help tourism that has been depressed due to Corona. Energy also became cheaper.
Analysts warn of a deflationary spiral
Some analysts anticipate that the inflation rate could fall to values of minus 1.0 percent in the coming months. This could lead many consumers to postpone larger purchases in anticipation of further falling prices, which in turn could trigger a spiral of deflation.