An office building is reflected on an electronic board showing the Japanese yen’s exchange rate against the U.S. dollar outside a brokerage in Tokyo on June 19.TORU HANAI/Reuters
When it comes to heavy central bank intervention in the economy, it would be hard to top the Bank of Japan's all-out effort to attack chronic deflation and revive a flatlining economy. Since shedding its traditional reticence in 2013 about deploying ultra-aggressive monetary tools, the bank has unleashed record torrents of monetary stimulus.
But halfway through 2015, with the liquidity taps wide open, the desired outcome remains as elusive as ever. Exports are faltering despite a devalued yen; household spending is still unenthusiastic; and the spectre of economy-crippling deflation is once again casting a dark shadow over the landscape.
Japan releases its latest monthly inflation, household spending and unemployment numbers Friday. Most of the attention will be on prices. The consensus inflation forecast for May is 0.0 per cent year over year, and that may be optimistic.
The BoJ's policy-setting board decided last week to continue expanding the monetary base at an annual clip of ¥80-trillion ($799-billion), while staying relatively upbeat about the economic recovery and sticking to its revised forecast in April that inflation would hit its 2-per-cent target no later than September, 2016. But economists say the central bank's economic and inflation assessments are too rosy and that it will have to inject even more stimulus in the months ahead to keep deflation at bay.
Two and a half years after Prime Minister Shinzo Abe swept into office with a bold plan to turn around Japan's faltering fortunes, quickly dubbed Abenomics, the government's world-topping debt leaves little room for further fiscal expansion. And we may soon find out what happens when a central bank also runs out of ammunition in the midst of battle.
"No matter how the numbers turn out [this week], it really doesn't matter for the markets," said Carl Weinberg, chief economist at High Frequency Economics in Valhalla, NY. "The bottom line is that I don't think there's much more the Bank of Japan can do. They're already buying up pretty much all the [government] bond market, certainly at the margin. So they can't really increase their quantitative easing. And they can't cut interest rates, because they're already at zero."
The May data alone "will surely not trigger any policy response. But we remain convinced that the Bank of Japan will have to step up the pace of easing later this year, as inflation is unlikely to pick up as quickly as policy makers hope," said Marcel Thieliant, Capital Economics' Japan watcher.
Mr. Thieliant expects both headline and core inflation for May to show a decline of 0.3 percentage points from a year earlier.
"This would mostly be the result of a surge in prices a year ago as firms continued to pass on the higher sales tax to consumers, rather than any renewed plunge in prices this year," he said in an e-mail from Singapore. "However, gas and electricity prices are slated to fall by around 3 per cent in July, so inflation should still turn negative in the third quarter."
There is "scant evidence to suggest that the era of exceptionally low rates of inflation with multiple episodes of deflation has ended," Bank of Nova Scotia economist Derek Holt said in a note, warning that Japan's inflation rate could sink to its lowest reading in two years.
"In fact, it's entirely conceivable that this will just be a third failed attempt to buck long-run deflationary forces since the property and equity market bubbles popped [in 1991]."
This should be expected, because deflation "is the natural counterpart to a shrinking economy" stemming from a declining population and shrinking labour force, Mr. Weinberg said. He calls it "Econ 101. You take people out of an economy, it gets smaller. It means top-line growth is going to come down for almost every company [at about the same average rate as the decline in the population]. Some companies will always do better, but there's nothing good that can come from a shrinking population."
While a lack of inflation is worrisome, the same influences mean there likely won't be much cheer on the consumer spending or employment fronts either.
Capital Economics' Mr. Thieliant predicts a modest 2 per cent rebound in core household spending in May from the previous month, when spending shrank 3.5 per cent. That would leave spending "dangerously close to a contraction this quarter," he said.
The jobless rate for May is expected to come in at about the same 3.3 per cent level as in the previous month, just above the rate that in normal times might lead to wage pressures. But not when companies are worrying about demand. People tend to sit on their wallets if they expect prices are going to fall and real wages to remain relatively flat or lower.
"The whole deflation mindset is very hard to kick in just a couple of years," said Jennifer Lee, senior economist with BMO Capital Markets. "It's very much like a slow crawl at a snail's pace."