We Ask Kavan Choksi: Can Japan Avert Stagflation?

A senior central bank official recently said that Japan is unlikely to enter stagflation, a condition in which rising inflation and shrinking economic growth coexist. However, data showed the economy grew slower than expected in the fourth quarter. In addition, Kavan Choksi believes consumer inflation will accelerate as firms pass on costs to households due to the Ukraine crisis.

Nevertheless, the senior officer also said they do not expect Japan to experience stagflation. Instead, they expect Japan's economy to recover as the coronavirus pandemic's impact on service consumption eases, adding that solid external demand would help.

The comments, which come before the BOJ's policy meeting, indicate that the central bank will maintain its forecast of a moderate economic recovery while acknowledging rising inflationary pressures from the recent surge in energy prices.

According to a January assessment, the BOJ currently expects consumer inflation to "accelerate" as businesses "gradually" pass on rising raw material rates to consumers.

What Does This Mean for Policymakers

Kavan Choksi believes more negligible growth is bad news for policymakers trying to keep the country's fragile recovery on track.

According to the Cabinet Office's revised data, Japan's GDP expanded by 4.6 percent year on year from October to December. However, it was lower than the 5.6 percent gain predicted by economists and the 5.4 percent preliminary reading released last month.

While rising commodity and grain costs will raise energy and food prices in the short term, they will eventually harm the economy by reducing real household income and corporate profits.

In addition, Kavan Choksi believes inflation is the most direct spillover from the Ukraine-Russia conflict. With supply-chain and sanctions impeding the flow of commodities—mainly wheat, oil, and gas—the inflation picture, which was already problematic due to Covid-19, has deteriorated.

Even if the two primary countries involved resolve the conflict, Kavan Choksi believes there will be no easy solutions to the inflation problem. Sanctions will almost certainly continue to remove a portion of commodities from the global economy. As a result, inflation will remain high for a more extended period.