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Chief economist update: Deflated expectations lift deflation expectations

Inflation? What inflation? We need inflation.

While many, if not most, of its central bank peers - led by the Fed -- are pushing back against inflation concerns, the Bank of Japan (BOJ) cannot seem to drive growth in the country's consumer prices significantly beyond zero.

In his press conference after the 27-28 April FOMC meeting, Fed Chairman Powell stated that, "Readings on inflation have increased and are likely to rise somewhat further before moderating. In the near term, 12-month measures of PCE inflation are expected to move above 2 percent ... we are also likely to see upward pressure on prices from the rebound in spending as the economy continues to reopen, particularly if supply bottlenecks limit how quickly production can respond in the near term. However, these one-time increases in prices are likely to have only transitory effects on inflation".

This is the complete opposite of the BOJ's assessment revealed in the "Summary of Opinions at the Monetary Policy Meeting on April 26 and 27, 2021", where it revealed that,

"The year-on-year rate of change in the consumer price index (CPI) is likely to be slightly negative for the time being. Thereafter, it is expected to turn positive and then increase gradually..."

To be sure, latest data show that Japanese annual headline inflation remains in deflation (-0.4% in April from -0.2% in March) - the seventh straight month of falling prices. So does core inflation. Its annual growth rate has remained negative for the nine months running to -0.1% in the year to April.

Certainly, the upward revision in Japan's March 2021 quarter GDP contraction to an annualised rate of 3.9% (from the preliminary estimate of 5.1%) is cause for optimism.

Then again, the economy shifting back into reverse, following two straight quarters of expansion, presents bad tidings for inflation and overall growth - a catch-22 situation, if you will.

Japan needs inflation to ignite consumer spending and business spending that would lift economic activity but with the economy a quarter away from another technical recession, rational expectations theory dictates that both consumers and businesses will defer expenditures, slowing overall economic growth.

More so, given recent news that wage negotiations have settled on the low side.

As per Factset, "Kyodo cited Japan Business Federation figures showing major companies have agreed on an average pay hike of 1.82% in this year's annual spring wage negotiations, falling below 2% for the time since 2013 and the slowest pace since the aftermath of the 2008 financial crisis".

Not only that, Japan's fourth coronavirus wave has prompted mister and missus Miyagi to be more frugal -- BOJ estimated pandemic has led to JPY20T in additional savings last year (Factset).

Deflated expectations would keep Japan's deflation running for some time to come.

Read our full COVID-19 news coverage and analysis here.