Japan’s Deflation…

…seems to never end. The Japanese economy slowed last year (again), and the BoJ’s hoped-for return of moderate inflation remains an elusive goal:

Drop in consumer prices pressures Bank of Japan

Consumer prices fell for a seventh straight year in the 12 months to end-March 2005, confirming that the economy remains stuck in deflation in spite of three years of stop-start growth.

…The Bank of Japan is on Thursday widely expected to put back its prediction of a return to inflation from this year to next when it publishes a six-monthly report on future trends in prices and economic activity. Last October, the BoJ forecast a return to mild inflation, of 0.1 per cent, in the year to end-March 2006.

Sadakazu Tanigaki, finance minister, said: “The causes of deflation are hard to specify, given prices of some products started rising and corporate profits remain firm. But the fact remains that we are in deflation and we must continue efforts to beat it.”

Other data released on Tuesday contributed to what economists say is a fuzzy picture of an economy struggling to ease out of last year’s mild recession. Workers’ household spending was up 1.7 per cent in March against the previous year, while seasonally adjusted unemployment fell 0.2 percentage points to 4.5 per cent.

Atsushi Nakajima, chief economist at Mizuho, said: “The current situation is far from clear, but I am fairly confident about the economy in the near future.” Mr Nakajima cited continued strong growth in China, Japan’s biggest trading partner, and near-record corporate profits as reasons to be hopeful. Risks came from continued high oil and raw materials prices, as well as what he said were less-than-bright prospects for the US economy.

Japan has certainly provided macroeconomists with an excellent demonstration of just how difficult it is to get out of a deflationary cycle once you’re in one.

This also reminds those of us who worry about the sustainability of BWII just how different the situations of Japan and China are. Unlike China, Japan is unambiguously in the position where the inflationary effects of propping up the dollar are not just tolerable, but to be positively welcomed. But at the same time, it is China that has been forced to continue buying dollar reserves, while the yen’s peg against the dollar has been sustained with relatively little intervention from the Japanese authorities in recent months. This type of data makes one think that they’d almost welcome the chance to start intervening again…