Cheaper tomorrow? Bank of Japan battles entrenched 'deflation mindset'

Sun Nov 2, 2014 4:19pm EST
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By Lisa Twaronite and Stanley White

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda does not need to convince Japanese people like Kazue Shibata that deflation brings problems, but getting them to believe that higher prices will make things better is proving to be a harder sell.

Shibata, 65, who runs a small dress shop in central Tokyo, worries the BOJ's mission to hit a 2-percent inflation target could end up driving business away unless people also have more money in their pockets.

"If prices rise, people might not buy as much," she said, echoing a concern of many private-sector economists.

On Friday, Kuroda's BOJ doubled down on a high-stakes bet that the central bank can shake Japan's consumers from a defensive set of expectations hardened by a decade and a half of era of falling prices, lower incomes and stop-and-go growth.

"It's important for the BOJ to strongly commit to achieving its price target to get that price target firmly embedded in people's mindset," Kuroda said at a news conference on Friday, after the BOJ stunned markets with an unexpected expansion of its monetary stimulus program.

"It won't do much good in trying to shake off the public's deflation mindset if you just say inflation will reach 2 percent some day," Kuroda said.

At the core of Prime Minister Shinzo Abe's "Abenomics" agenda is the assumption that the outlook for sustained inflation will prompt consumers to anticipate rising prices, and that consumption will rise as a result.

That represents a sea change for a country used to deflation, where clinging to cash today meant greater buying power tomorrow, a set of expectations that has proven hard to shake a year-and-a-half into an unprecedented easing by the BOJ.   Continued...

Bank of Japan (BOJ) Governor Haruhiko Kuroda points to a placard showing BOJ policy decisions during a news conference at the BOJ headquarters in Tokyo October 31, 2014. REUTERS/Issei Kato