Japan’s prime minister says return of deflation cannot be ruled out despite price jump Reuters

© Reuters. Japanese Prime Minister Fumio Kishida speaks during a news conference after the US-Japan summit in Washington, U.S., January 14, 2023. REUTERS/Julia Nikhinson

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TOKYO (Reuters) – Japanese Prime Minister Fumio Kishida said on Friday that a return to deflation in the world’s third-largest economy could not be ruled out as domestic demand remained weak.

The comment came hours after data showed Tokyo consumer inflation, Japan’s leading price gauge, hit a 42-year high in January, keeping the central bank under pressure to gradually ease its easy monetary policy.

However, Kishida told a session of the upper house of parliament that inflation was driven by high global raw material prices and a weak yen, not strong domestic demand.

When asked by an opposition lawmaker whether the Japanese economy has fully emerged from years of deflation, Kishida said: “Currently, there is a state without deflation, but it has not reached a stage where we can judge that a return (to deflation) is unlikely.”

The Bank of Japan (BOJ) surprised financial markets last month by deciding to allow 10-year bond yields to move in a slightly wider range to just above or below zero, fueling speculation that it is preparing the ground for a gradual exit from its super-loose policy.

But Kishida described the move as an operational adjustment to soften the impact of monetary easing, which is roiling the country’s bond market. The BOJ made no further changes at its mid-January meeting.

Policymakers are hoping that wage increases this spring will moderate higher living costs and boost consumer spending.

“The government and the BOJ have agreed to work closely together in the direction of economic growth in tandem with structural wage increases and sustainable, stable achievement of the inflation target,” Kishida said, repeating his previous remarks.

He also refrained from commenting on whether there would be a review of the joint government-BOJ economic policy statement that has empowered policymakers to fight deflation since 2013, saying a new BOJ governor had not yet been elected.

Kishida said on Sunday that he would name the next BOJ chief next month before incumbent Haruhiko Kuroda’s second five-year term expires on April 8.

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