And recent signs of a Japanese recovery now seem to be fading: The economy grew an anemic 0.1 percent between April and June. Meanwhile, a strengthening yen, which hurts Japan by making its exports less competitive, has many people calling for the bank to further ease its monetary policy to shore up the economy — if not outright government intervention in currency markets.
But on Monday, hopes for decisive action were dashed when Prime Minister Naoto Kan and the governor of the Bank of Japan, Masaaki Shirakawa, opted not to hold a widely anticipated meeting, but instead engaged in a 15-minute phone call in which the two did little more than agree to “communicate closely with each other.”
“There was absolutely no talk” of currency intervention in their conversation, said Yoshito Sengoku, the government’s top spokesman.
Following Mr. Sengoku’s comments, the Nikkei stock index slipped 0.68 percent, to 9,116.69, its lowest close this year. The yen continued to hover close to 15-year highs, or around ¥85.35 to the dollar.
“The government has again taken a wait-and-see attitude,” said Norio Miyagawa, asenior economist at Mizuho Securities Research and Consulting. “The truth is, there are no quick fixes, but markets are disappointed that they got nothing at all.”
Indeed, while Japanese economic officials have long been accused of moving too slowly and timidly, they now seem to have few good options, whatever their will for pursuing them.
In the United States, there has been considerable debate about whether the U.S. economy faces a similar deflationary risk and whether the Federal Reserve should be doing more to guard against falling into the same trap.
Some of those fears may well be overblown, but a widely read paper by James Bullard, the Fed’s regional bank president from St. Louis, has warned that the U.S. economy faces a risk of becoming “enmeshed in a Japanese-style deflationary outcome in the next several years.”
Japan’s experience shows that deflation can creep up on an economy — and can be extremely difficult to shake.
In Japan, companies remain unsure of how much to invest, because deflation makes it unclear how much they can sell — and for how much. Households have little incentive to spend, knowing goods and services will get cheaper the longer they wait.
That lack of spending, in turn, is deepening Japanese deflation, as companies are forced to decrease prices in a desperate bid to attract buyers.
An aging, dwindling population has further sapped demand. So have widely held fears over jobs, wages and pensions, which are prompting consumers to hunker down and save instead of spend. “Zombie” companies, propped up by rigid regulations and comfy ties with banks, leave little space for newer companies that might take more investment risks, offer more innovative products and services, and stimulate demand.
“Japan’s deflation is not caused by a lack of liquidity or high interest rates,” said Masaaki Kanno, chief economist at JP Morgan Securities Japan. “The problem is that people and firms do not want to spend money.”
Any opportunity for fresh stimulus spending is limited by a $10 trillion public debt that is twice the size of the Japanese economy, as well as an impasse in the country’s Parliament.
Mr. Kan appeared to back away Friday from recent talk of more stimulus, instead indicating that he would lean on the central bank to do more to sustain Japan’s recovery. “We need to think more about ways to boost the economy that don’t rely on pump-priming,” Mr. Kan said.
The central bank’s options are also limited. With the main interest rate under its control — the so-called policy rate — at 0.1 percent, the bank has little leeway to lower rates further. That limits the bank to measures like buying up long-term government bonds, or pumping more short-term financing into banks, an approach it introduced in December.
But consumer demand in Japan has become so weak — and deflationary expectations are now such the norm — that the economy seems no longer to respond to such monetary tools.