Comment on “Chronic Deflation in Japan”

• Published date: 01 January 2014
• Author: Kazuo Ueda
• Date: 01 January 2014
• DOI: http://doi.org/10.1111/aepr.12042

Comment on “Chronic Deflation in Japan”

Kazuo UEDA†

The University of Tokyo

JEL codes: E51, E58, O53

Nishizaki et al. (2014) provide a useful summary of stylized facts and existing studies

about Japan’s deflation. Put simply, inflation may be written as π=F(Z, MP), where πis

the inflation rate, MP represents monetary policy measures, and Z is all the other vari-

ables affecting inflation. Deflation may ensue if (i) MP is not effectively used, (ii) the

power of MP to affect inflation is low due, say, to the zero lower bound on interest rates

(ZLB), or (iii) significant negative shocks, Z, hit the economy. Most of Nishizaki et al.’s

discussion is devoted to Z, but in addition, interactions between Z (a decline in the

natural rate of interest/inflation expectations) and the ZLB, and those between MP

(central bank communication) and Z (inflation expectations), are also discussed. In the

following, I would like to point out some factors that might have affected inflation devel-

opments in Japan, but that are not quite addressed by Nishizaki etal.

Let me first mention the possibility that Nishizaki et al. only briefly discuss, that is,

deflation may have been caused by an inappropriate use of MP, or for that matter, by the

the Bank of Japan’s (BoJ) implicit policy of targeting a near-zero inflation rate. The case

in point are the two exits – one in 2000 and the other in 2006 – from a forward guidance

strategy despite a negative core consumer price index (CPI) inflation rate. As Ueda

(2013) points out, the BoJ internally discussed what the appropriate inflation target was

at the end of year 2000, but was unable to choose between small positive inflation and

zero inflation. Such developments may have affected the public’s or the market’s percep-

tion of the BoJ’s resolve to fight deflation, despite efforts aimed at improving communi-

cation, as discussed in Nishizaki et al. Although the two exits and/or the doubts about

the BoJ’s intention to target a positive inflation rate were probably not a direct cause of

deflation, they may have undermined the power of subsequent easing measures to stimu-

late the economy.

Nishizaki et al. point out, as do other recentdiscussions of Japan’s Phillips curve, that

the curve has become flatter since the late 1990s. Thus, inflation did not rise much in the

mid-2000s despite a fairly strong recovery.Going forward, inflation may not go up to the

current 2% inflation target easily. On the other hand, the flattening of the curve has

meant that deflation did not accelerate during the last 15 years. In a sense, inflation has

been rigid downward. This is puzzling because of the large and persistent gross domestic

product gap that is discussed by Nishizaki et al. It is even more puzzling because wages

have not been as rigid downward as has the CPI. One wonders if there has been a

†Correspondence: Kazuo Ueda, Department of Economics, The University of Tokyo,7-3-1 Hongo

Bunkyo-ku, Tokyo 113-0033, Japan. Email: ueda@e.u-tokyo.ac.jp

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doi: 10.1111/aepr.12042 Asian Economic Policy Review (2014) 9, 40–41

© 2014 The Author

Asian Economic Policy Review © 2014 Japan Center for Economic Research

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