Protracted Battle with Persistent Deflation Engulfs BOJ in 2015: Transcript Reveals
### BOJ's Easing Policy Faces Concerns Amid Prolonged Deflation
In April 2015, the Bank of Japan (BOJ) found itself grappling with deflation, two years after the introduction of its quantitative and qualitative monetary easing policy. During a meeting on April 8, BOJ Deputy Governor Hiroshi Nakaso praised the policy, stating that it was demonstrating its intended initial effects[1]. However, concerns about potential adverse impacts if the policy remained in place for a prolonged period were raised by unspecified members of the policy board[1].
The nearly flat inflation in 2015 was a result of several factors. Lower crude oil prices contributed significantly to this trend[1]. Inflation, as measured by the core consumer price index, was briefly pushed up by the BOJ's policy to around 1.5%[1]. This increase followed a consumption tax hike in April 2014[1].
Japan's deflationary struggles can be traced back to the early 1990s, following the collapse of its asset bubble. This event initiated a period known as the “Lost Decade,” a multi-decade stagnation marked by weak growth and falling prices[2]. Deflation became entrenched in consumer expectations, making it increasingly difficult to reverse despite aggressive policy measures[2].
In 2013, the BOJ, under Governor Haruhiko Kuroda, launched its unprecedented asset-buying program, aiming to break the deflationary mindset by targeting 2% inflation[1]. This initially boosted stock markets and led to a temporary rise in prices[1]. However, the effect on consumer prices was short-lived, especially after the global oil price plunge in late 2015, which pushed inflation back toward zero[1].
The BOJ found itself constrained by early 2016. Further bond purchases risked contradicting the logic of eventual tapering, and lowering already-negative interest rates drew public backlash[1]. With conventional tools exhausted, the BOJ doubled down on buying exchange-traded funds (ETFs), effectively subsidizing equity markets rather than achieving sustained inflation in the real economy[1]. This highlighted the limits of monetary policy in addressing deeply rooted deflationary expectations.
The impacts of Japan's prolonged deflation were profound. Weak consumer spending and delayed investment dampened aggregate demand, contributing to a vicious cycle of stagnant growth[2]. Persistent deflation increased the real burden of debt on both the public and private sectors, leading to tightened credit and further stifling economic activity[2].
The government's efforts to address its massive public debt, exceeding 200% of GDP, were complicated by deflation and weak growth[3]. While consumption tax hikes were introduced to stabilize debt, these also risked depressing demand, forcing additional fiscal stimulus to offset the negative impact[3].
Japan's prolonged deflation and slow growth meant it lost its position as the world’s third-largest economy in nominal terms by 2024, due to a weak yen[4]. Despite some years of higher nominal GDP growth, real (inflation-adjusted) growth remained minimal[4].
| Factor | Description | Economic Impact | |-------------------------------|-----------------------------------------------------------------------------|--------------------------------------------------| | Asset bubble collapse | Early 1990s crash led to decades of stagnation | Entrenched deflation, weak growth | | BOJ’s QQE (2013) | Massive asset purchases and negative rates | Short-lived inflation, stock market gains | | Oil price shock (2015) | Global oil prices plummeted | Inflation fell back to zero | | Policy exhaustion (2016) | Limits to further monetary easing | Continued deflationary expectations | | High public debt | Debt/GDP > 200%, consumption tax hikes | Fiscal constraints, need for stimulus | | Demographic decline | Shrinking, aging population | Labor shortages, pressure on social systems | | Consumption tax increase | Happened in April 2014 | Temporary rise in inflation |
[1] “BOJ Confronts Concerns Over Prolonged Easing Amid Deflation,” Nikkei Asian Review, April 10, 2015,
[2] “Japan’s Lost Decade: Causes and Consequences,” The World Bank, June 16, 2020,
[3] “Japan’s Fiscal Challenges,” International Monetary Fund, October 2018,
[4] “Japan’s Economy: A Long-Term Perspective,” The Economist, July 12, 2019,
In the context of Japan's prolonged deflation, some Board members raised concerns about potential adverse impacts if the BOJ's policy remained in place for a prolonged period.
In an effort to achieve sustained inflation in the real economy, the BOJ doubled down on buying exchange-traded funds (ETFs) but this approach also raised questions about the effectiveness of finance sector-focused policies in addressing deeply rooted deflationary expectations in the industry.
