According to the analysis of the Hideo Hayakawa, a former top economist of Japan’s central bank, the country could see an increase in inflation because of the novel coronavirus pandemic impact which has boosted the amount of money flowing into the country’s economy.
As a part of its policy of quantitative easing, the central bank of Japan – the Bank of Japan, has been printing money aggressively for years now. The bank hopes that the third largest economy of the world would see a spur in consumption and be able to reach a rate of inflation of 2 per cent – a target that has remained elusive.
However, most of the money has come to be parked with reserve fund of financial institutions instead of being spread throughout the country and the economy with Japanese companies, known to be risk averse, resisted increasing spending to any significant degree to have an impact on the economy.
However Hayakawa said that since the country s hit with the novel coronaviru pandemic, the money that is being printed by the BOJ is now trickling down to households and companies with the Japanese government increasing spending and with commercial banks also increasing their lending to companies hit by the pandemic and becoming cash strapped.
“Money is flowing into companies and households, leading to a surge in savings,” Hayakawa, whose views are closely tracked by incumbent policymakers, told the media. “Consumption could boom once the pandemic subsides, pushing up growth and inflation.”
He said that it should not be assumed by policymakers that continued deflation in the economy will cap bond yields and will allow the country to continue with a huge fiscal deficit at low cost forever even if that scenario is not reached for years.
“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. If there is such n increase, the bank could be forced to consider cutting down on stimulus without resulting in an unwelcome surge in yields.
With companies in rennet months holding on to cash to tide over the sweeping impact of the pandemic, lending by banks in Japan has reached a record high.
In June, a record of 786 trillion yen ($7.4 trillion) was recorded in deposits while an 8.3 per cent year on year growth in deposits was recorded in July with Japanese households saving some of the cash that was given to them by the government through the stimulus programs aimed at offsetting the economic hit of the pandemic.
(Adapted from Reuters.com)