Japan’s long deflation may be ending

London, September 16:

Japan’s stock market hit a new four-year high after the deputy governor of the Bank of Japan, Kazumasa Iwata, raised hopes that the economy was emerging from its long period of deflation. Although well behind its peak in the late 1980s of almost 40,000, Japan’s benchmark Nikkei index continued its post-election rally yesterday to close 152.5 higher at 12,986.8. Iwata said he expected consumer price inflation to turn up later this year. This would end seven years of deflation in Japan. “As long as Japan’s economy continues moderate but sustained and sustainable growth, the prospects for emerging from deflation are bright,’’ he said at a meeting in Nagoya.

Japanese consumers appear to be regaining confidence after years of weak domestic demand. A survey released yesterday showed sentiment improving for the second month in a row in August. Julian Jessop, of Capital Economics, said, “The economy has been steadily improving, led by an improvement in consumer spending and an increase in corporate investment.’’ Consumer spending has increased as the labour market tightened, with a return of wage inflation.

The positive outlook follows a landslide victory for Junichiro Koizumi’s Liberal Democratic party last weekend. The Nikkei rose sharply on the decisive return of the party with the best economic record. Hopes are high that this time the world’s second-largest economy will expand after several false starts in recent years. However, Jessop said he was concerned at Koizumi’s pledge to step down as leader of the party by September next year. “I am concerned that the LDP may become complacent about the pace of economic reform.’’ Koizumi’s victory means that privatisation of the post office, the world’s biggest savings bank, is back on track but there are still big battles to be won over healthcare and pension reform, he added.

The Bank of Japan has kept its monetary policy extremely loose, with interest rates at 0 per cent for more than four years to stimulate economic activity. The government also kept fiscal policy very slack, borrowing large amounts and spending on public works to restore confidence. Japan has followed these policies to try to reverse the economic slump caused by a property recession in 1990s and a collapse in the banking system.