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By Bilal Hafeez 01-08-2019

Overcoming Deflation: Japan’s Experience and Challenges Ahead (Speech at the 2019 Michel Camdessus Central Banking Lecture, 10 min read)

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A persistent deflationary environment combined with low interest rates has been troubling Japan for decades. Now it’s no longer the only case – a number of developing economies have followed suit. In this speech directed to the IMF, the Governor of Bank of Japan, Haruhiko Kuroda, explains how Japan escaped deflation using a two-pronged, powerful monetary easing approach (‘QQE with Yield Curve Control’) but is still struggling to reach the 2% inflation target. Kuroda believes that inflation expectations play a big role in recovery, but with stagnation embedded in the Japanese consumer and investor mindset, it takes a lot to break. Further, this has kept wages low, even though unemployment has fallen to 2.5% and the Phillips curve has flattened as a consequence. Amidst a global environment of uncertainty, the Governor holds his stance on aggressive monetary policy stimulus as the remedy.

Why does this matter? In the US, inflation hasn’t hit its goal sustainably since the Fed formally adopted it in 2012. Stubbornly low inflation has also hiked the risk that expectations for future inflation will drift lower. In light of the Fed rate cut this week, it’s worth taking stock of Japan’s experience.

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