Pandemic may fire up Japan's inflation, doing what
cenbank could not, economist says
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[August 25, 2020] By
Leika Kihara and Takahiko Wada
TOKYO (Reuters) - The coronavirus shock is
boosting the amount of money flowing into Japan's economy and may fire
up inflation, achieving what years of ultra-loose monetary policy failed
to do, the central bank's former top economist, Hideo Hayakawa, said on
Tuesday.
The Bank of Japan has been printing money aggressively for years as part
of a policy of quantitative easing, hoping to spur consumption in the
world's third biggest economy and reach an elusive inflation target of
2%.
But most of the money piled up in financial institutions' reserves
instead of spreading out across the economy, as risk-averse Japanese
firms stayed wary of boosting spending.
After COVID-19 struck, however, the money printed by the BOJ is
trickling down to households and companies, as the government ramps up
spending and commercial banks boost lending to cash-strapped firms, said
Hayakawa.
"Money is flowing into companies and households, leading to a surge in
savings," Hayakawa, whose views are closely tracked by incumbent
policymakers, told Reuters. "Consumption could boom once the pandemic
subsides, pushing up growth and inflation."
Even if that scenario is not reached for years, policymakers should not
assume that persistent deflation will cap bond yields, allowing Japan to
run a huge fiscal deficit at low cost forever, he said.
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A man wearing a protective mask walks past the headquarters of Bank
of Japan amid the coronavirus disease (COVID-19) outbreak in Tokyo,
Japan, May 22, 2020. REUTERS/Kim Kyung-Hoon
"There's a strong belief among Japanese policymakers that prices will never perk
up, and so it's okay to keep running a huge fiscal deficit," said Hayakawa, who
is now a senior fellow at the Tokyo Foundation for Policy Research.
"But you never know how COVID-19 could affect prices. The biggest fear for the
BOJ is a steady rise in inflation," he said, adding that such an increase would
force the bank to consider whittling down stimulus without sparking an unwelcome
spike in yields.
Bank lending has hit a record high in recent months as companies hoarded cash to
tide over the sweeping impact of the pandemic.
Deposits also rose to a record 786 trillion yen ($7.4 trillion) in June and
surged 8.3% in July from a year earlier, as households saved some of the cash
doled out by the government in its steps to cushion the disease blow.
(Interactive graphic tracking global spread of coronavirus: open https://tmsnrt.rs/3aIRuz7
in an external browser.)
(Reporting by Leika Kihara and Takahiko Wada; Editing by Clarence Fernandez)
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