While the BOJ issued a statement at its October policy meeting saying that it had achieved the 2% price stability target, it stopped short of declaring an end to deflation under the Abe administration. The article organizes deflation since the 1990s into 3 phases, explaining that the first involved companies prioritizing debt repayment and the next involved manufacturers accelerating overseas relocation because of yen appreciation.
At its October monetary policy meeting, the BOJ left its policy rate unchanged and issued a statement saying that conditions were broadly consistent with the price stability target. This suggests a sense of achievement for the first time in 13 years and 10 months since the 2013 joint statement, although whether politicians will formally declare an end to deflation is a separate question, and debate continues over whether Japan has escaped sustained price declines.
The first deflationary episode progressed as companies repaid debt. Following the collapse of the bubble economy, declines in asset values left companies with outstanding liabilities, while banks prioritized recovering their loans. Capital investment was restrained, demand for machinery and construction declined, and the situation in which the corporate sector ran a savings surplus and held back on investment persisted for an extended period.
The second deflationary episode refers to the acceleration of manufacturers' relocation overseas amid yen appreciation. Exports declined during the global financial crisis after the Lehman shock, while the yen appreciated further. Local production and sales in Asia, particularly China, expanded, creating a structure in which value was generated locally and the tax burden was concentrated there. The BOJ was criticized for a disconnect between Governor Kuroda's view that the yen should weaken and actual conditions.
Corporate savings surpluses have continued even after the third deflationary episode. New factories have been withdrawn while old factories remain, accelerating the zombification of companies. Even where investment in new equipment could be sold, factors including the difficulty of dismissing older workers at old factories have reduced medium- to long-term growth potential. The article concludes by directing readers to Agora Salon for the continuation.