Japan faces wage hurdle in bid to end deflation
Falling prices bring consumers joy but the government wants inflation of 2 per cent
A decade and a half after Japan slumped into deflation, the central bank is set to signal its strongest effort yet to reverse the trend. The biggest challenge may be that the nation has come to rely on falling prices.
More than 80 per cent of respondents in a Bank of Japan survey released this month who noticed rising prices last year said it was bad. More than a third of those who said prices fell were happy about it.
Even so, the bank next week will adopt the government's desired 2 per cent inflation target, according to 20 of 22 economists surveyed.
Ending consumer price declines would give companies and households more incentive to borrow, and boost revenue for businesses and the government in a nation that saw its third recession in five years last year.
The danger: prolonged deflation has altered behaviour across the economy, from entrenching declines in pay to driving more than half of savings into cash.
"The key is wages," said Nobuyasu Atago, a principal economist at the Japan Centre for Economic Research and a former central bank official in charge of price data. "Without pay increases, the economy won't recover and households will only suffer from inflation."