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2018 Vol.3
Let’s End the 20-Year War on Deflation


Japan’s battle against deflation began in the spring of 2001 and has now entered its 18th year. Why has it not ended? Ultimately, was this even a war worth waging? The battle against deflation began with a government declaration to combat it, but it has been the Bank of Japan (BOJ) that actually fights the battle. Once the declaration was made, the BOJ suddenly came under pressure to ease the monetary policy. A second declaration to combat deflation was announced in November 2009, and in October 2010 the BOJ decided to pursue a “comprehensive monetary easing” under Governor Shirakawa. The decision subsequently led to the unprecedented quantitative easing put forward by Governor Kuroda. In April 2013, Governor Kuroda introduced quantitative and qualitative monetary easing. Before that, in January of the same year, the government and the BOJ revealed in a joint statement their shared basic guidelines for monetary policy that were aimed at stopping deflation, including a 2% inflation target. Unprecedented changes followed: substantial increases in BOJ-owned long-term Japanese government bonds (JGBs), an inflation target that is difficult to achieve, and a loss of central bank independence. Another unprecedented change was the negative interest rate policy introduced in January 2016. With these changes, the battle against deflation rapidly accelerated. Due to the quantitative and qualitative monetary easing with yield curve control that were introduced in September 2016, the pace of growth in the monetary base and BOJ-owned long-term JGBs slowed, and the 10-year JGB yield turned positive. The escalating battle against deflation had reached a turning point. The BOJ seems to have taken a small step away from quantitative easing as part of efforts to normalize its monetary policy. Ending the battle against deflation requires reexamining the 2% inflation target and ending the strategies put forth in the government-BOJ joint statement by declaring the end of deflation. If moderate levels of deflation are accepted, there is no need for combating deflation.