Bank of Japan Deputy Gov. Kiyohiko Nishimura indicated Thursday he is not concerned that the recession will trigger a return of sustained price declines.
"It's crucial to look at companies' and households' inflationary expectations over the medium to long term to determine whether the economy slips into a deflationary spiral," Nishimura said in a speech in Utsunomiya, Tochigi Prefecture. Those expectations "are stable now," he said.
A collapse in demand for Japanese products at home and abroad has raised concern that the country will experience a repeat of the deflation that plagued it for a decade until 2005. The International Monetary Fund said Wednesday that Japan's economy will shrink this year at the fastest pace in the postwar era.
"Increasing deflationary pressure is a very serious concern," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. "Rapid production cutbacks will eventually cause more job cuts and falling wages, which will weaken consumer spending."
BOJ Policy Board members last week forecast consumer prices excluding fresh food will fall 1.1 percent in the year starting April 1, as commodity costs tumble and the economy contracts. Core price declines will ease to 0.4 percent in the following year, they said.
BOJ Gov. Masaaki Shirakawa also said last week that he doesn't see much risk of a sustained drop in consumer prices.
Nishimura said a deflationary spiral exists when falling prices invite a further round of price declines, hurting economic growth.