Japan's Prime Minister has warned that deflationary risks remain a concern for the world's third-largest economy, pushing back against expectations of a swift exit from decades of falling prices. Speaking in Tokyo on Monday, the PM said that while the economy has shown signs of recovery, the battle against deflation is not yet won.
The statement carries weight for global markets, as Japan's ultra-loose monetary policy has been a key driver of yen weakness and a boon for Japanese exporters. The Nikkei 225 index, which has rallied sharply over the past year on the back of corporate reforms and a weaker yen, slipped 0.6% in early trading following the remarks. The broader Topix index also edged lower.
For UK investors and pension holders, the situation in Japan matters because many British pension funds hold significant allocations to Japanese equities. The MSCI Japan Index, a common benchmark, has delivered strong returns in recent years, partly due to currency effects. However, if the Bank of Japan is forced to maintain or even expand its stimulus measures, the yen could remain weak, affecting the sterling value of those holdings.
Analysts at London-based Capital Economics noted that the PM's comments suggest the Bank of Japan will be in no hurry to normalise policy, even as other central banks, including the Bank of England, tighten. 'The divergence in monetary policy between Japan and the UK is likely to persist, keeping the yen under pressure against the pound,' they said in a note.
The Japanese government has struggled for decades to generate consistent inflation above 2%, despite aggressive bond-buying and negative interest rates. While recent data showed core consumer prices rising at a modest pace, the PM's caution underscores the fragility of the recovery. Sectors such as Japanese retail and real estate, which are sensitive to domestic demand, remain vulnerable to any renewed deflationary spiral.