(Bloomberg) -- Japan’s government and central bank are united in their determination to stop the country sliding back into a negative cycle of falling prices and economic stagnation, according to economy minister Yasutoshi Nishimura.At the same time, Japan will put the need to contain the spread of the coronavirus ahead of calls to reopen the economy, keeping its biggest urban areas of Tokyo and Osaka under a state of emergency until at least the end of May, said Nishimura, who is also the minister in charge of virus response. “We share with the Bank of Japan a firm determination that we will absolutely not allow deflation to return,” Nishimura said in an interview Wednesday. “We also share a strong sense of crisis as we work together to deal with the current situation.”
Japan has seen the fewest confirmed Covid-19 infections and related deaths of any Group of Seven leading democracy and Nishimura said the government is looking to end its national state of emergency at the end of this month. “Even if we do remove it, we will restore things gradually. It won’t mean that everything is immediately freed up.”Nishimura’s strong backing of the need to avoid a reemergence of deflation as the pandemic triggers a cratering of global demand suggests more policy action could be in the works.
Government experts are expected to advise on Thursday which regions of the country can start to resume more activities. Japan’s capital has been the worst-hit by the virus, with about 5,000 cases confirmed. “It’s going to be difficult to lift the state of emergency in Tokyo tomorrow. So with urban areas still in a severe situation, we need to be prepared for a substantial downturn,” Nishimura said.The likely decision to keep the economic powerhouses of Tokyo and Osaka under virus restrictions also shows the government prioritizing management of the health crisis over the economy amid criticism that it has been slow to respond to the pandemic and its measures have been insufficient.
The comment on deflation comes amid doubts over the Abe administration’s desire to see prices rise as part of its economic platform after senior government officials have notably refrained from referring to the BOJ’s 2% price goal.
Japanese households cut monthly spending by the most in 5 years in March, as the virus spread. Adding to the gloomy news, Japan’s biggest automaker, Toyota Motor Corp, warned this week that profit will fall 80% to a 9-year low as consumers hold off on major purchases.
The immediate focus of policy makers is to keep companies afloat and workers employed while containing the virus. But concerns are building that the likelihood of the worst contraction in the economy since World War II in the current quarter, combined with rock-bottom oil prices, could push Japan back into a deflation hole it has spent so much time and effort trying to escape from.Economists surveyed by Bloomberg this month expect the economy to shrink at an annualized pace of 22% in the current quarter, while the BOJ sees inflation averaging as low as -0.7% over the 12 months to March 2021.The question remains how much they can do with the world’s largest public debt burden and few monetary tools left following more than seven years of unprecedented monetary easing. The central bank has already bought a mountain of assets that is bigger than the entire economy as part of its campaign to slay deflation.
Fears that other countries may also succumb to the stagnation seen in Japan in the past has generated much talk of the need to avoid the Japanification of economies globally.
Nishimura attended two BOJ policy meetings since March in a rare move for his position where he asked the bank to continue to take appropriate policy by closely watching economic developments. The BOJ more than doubled its purchase of corporate bonds and promised to buy bonds without a limit at its April gathering.
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