(#゜Д゜)/英字新聞

Take every step to fight deflation
Are we seeing the start of a vicious circle in which both the economy and prices decline simultaneously?
The nationwide consumer price index fell 1.1 percent in May, year on year, recording the largest monthly drop since the end of World War II.
The previous biggest fall in the CPI was 1 percent, recorded in May 2001. At that time, the Bank of Japan was fighting deflation, using the quantitative monetary relaxation policy for the first time.
Prices have dropped more steeply than those at that time, and the rate of decline is expected to increase.
In the summer of 2000, the central bank lifted its zero-interest-rate policy on the strength of its optimistic view on the outlook for the economy. The move aggravated deflation.
This time, one misstep could lead to deflationary spiral. Now that the economy has shown slight signs of recovery, every possible measure needs to be taken to end deflation.
The effects of falls in crude oil and grain prices, which skyrocketed last year, are huge. However, the extent of reduction in prices of items excluding gasoline and food are continuing to widen. Even disregarding these special factors, we believe it is wise to consider the economy is coming under deflationary pressures.
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Domestic demand anemic
One major factor is the slump in domestic demand, including consumption. Department store sales have posted declines for 15 months in a row, and supermarket sales have fallen for six straight months.
Many stores have cut the prices of items they sell and brought forward summer sales. This is because goods tend not to sell unless they are marked down. Department stores are struggling to sell clothing items, but low-price brand clothing stores are doing good business.
Shrinking incomes due to corporate restructuring and cuts in overtime work are encouraging households to buy inexpensive goods. As a result, companies are engaged in price wars, leading to a decline in profits. This in turn translates into further wage cuts.
Curtailing spending is the right choice for individuals, but at the macroeconomic level, it prolongs a slump. Deflation must be seen as an intractable disease that debilitates the economic vitality of a nation.
One major problem is the 45 trillion yen demand-supply shortfall. So that the effects of current economic measures can kick in, the government must come up with new policies seamlessly.
Measures that can boost demand--such as programs to fight unemployment, aid for medical and nursing care, and promotion of growing businesses, such as those in the environmental and energy-saving fields--must be given priority. Belt-tightening polices such as across-the-board cuts in social security spending are counterproductive amid deflation.
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Quantitative easing needed
If pessimistic views that deflation will deepen prevail, the economic situation may drastically deteriorate.
To combat the financial crisis that started in autumn, the Bank of Japan has supplied a large amount of funds to the market by purchasing long-term government bonds and corporate bonds, and the market has calmed down.
The main battlefield of monetary policy likely will shift to deflation. The central bank would be well advised to come up with comprehensive quantitative easing measures with numerical targets and pledge those measures will be maintained until prices start to rise.
The Bank of Japan needs to show its determination to fight against the malignancy of deflation.