COVER STORY • 2

W

ith Fiscal Expansion in Responseto the Coronavirus, Abenomics 2.0
Can Bring Japan Out of Deflation

By Takuji Aida

With the “coronavirus shock” creating what can be consideredJapan’s worst postwar economic downturn, the government has
further shifted away from its former austere mindset with regard to
fiscal policy and embarked on even larger fiscal stimulus toovercome the crisis. Nevertheless, there are strong concerns over a
coronavirus-induced economic downturn, and even after thecoronavirus shock is overcome, the path toward renewed economic
recovery and an exit from deflation is unclear. What kinds of
economic policies should be pursued? What is needed to avoid an
L-shaped economy? What is necessary to advance from a sluggish
U-shaped recovery to a more rapid V-shaped recovery? In a solid
economic recovery, how do we return to the path of exiting fromdeflation?
There are three cycles that determine the shape of an economic
recovery and a complete exit from deflation – credit, capital
expenditure, and reflation. The first thing that needs to be done is afull mobilization of economic policies, both fiscal and monetary, toraise the credit and capex cycles. Then, continuing with a strong
policy mix of fiscal expansion and monetary easing, if Abenomics 2.0
swings the reflationary cycle to the upside, something that was
missing from Abenomics 1.0, it may be possible to finally pull Japan
completely out of deflation. With a strong policy mix of expansionary
fiscal policy and monetary easing, the bottlenecks that have been
impeding the expansion of the monetary economy and preventing
inflation from picking up have started to be resolved. The same could
be said about the United States and Europe. Removing the bottleneck
could change the direction of the global deflation that has been aweight on economic activity to date, to inflation that accelerates andstimulates economic activity.

Why Has Japan Persistently Remainedin a State of Deflation?
For many years, prices in Japan have continued to decline on thelack of expectations for future economic growth. This has meantcompanies have emphasized restructuring and other cost reductions
rather than investment. Wages have declined, putting pressure on
household income. In a normal economy, companies procure funds
to develop and expand their businesses. Corporate borrowing means
they have a negative corporate savings rate (i.e. there is demand forfunds by businesses). In Japan, however, companies are following
the pattern of households and curtailing outlays and striving to save,
8 Japan SPOTLIGHT • November / December 2020

Author Takuji Aida

continuing to repay debt as a deflationary hedge. This has caused thecorporate savings rate to become abnormally positive (i.e. there isno demand for funds by businesses). If businesses that normallydemand funds stop demanding funds, outlays decline and put
downward pressure on domestic demand. As a result, since thebursting of the economic bubble around 1990, Japan’s economy has
been plagued by weak domestic demand and deflation. If companies
are having the effect of depressing demand, the government could
step in and increase demand. Interest rates have remained extremely
low because the lack of fund demand by corporates is indirectly
supporting the financing of large-scale government outlays.
By not escaping from the old mindset that fiscal deficits during
periods of corporate demand for funds (when corporate savings
rates are negative) create the risk of high interest rates, thegovernment has continuously been half-hearted in its fiscal
expansion policies. In addition, with economies overseas showing
strength, as soon as Japan’s economy begins to improve thegovernment has raised taxes and implemented austerity measures
before the economy completely escapes from a state of weakdomestic demand and deflation. With this type of contractionary
fiscal policy, the safety net to rescue the weak disappears and leads
to a negative cycle, with declining wages strengthening households’
concerns regarding the future, which in turn weakens demand, which
in turn shrinks the size of the business pie, which causes companies
to pursue further restructuring and cost cutting, including wages,
rather than investment. As a result, concerns about declining wages,
shrinking business pies, and declining prices from weak demand
become entrenched in the economy (Chart 1).

Launch & Stalling of Abenomics 1.0
Abenomics 1.0 was launched in 2013 with the aim of pullingJapan completely out of deflation. The Bank of Japan (BOJ) moved
forward with unprecedented large-scale monetary easing. Interest
rates fell to practically zero. The large amount of funds available tofinancial institutions strengthened a sense of reassurance amongsmall and medium-sized companies (SMEs) that they could procure
funds whenever they needed it to an extent never seen before. The
BOJ Tankan financial institution lending attitude diffusion index forsmall enterprises and leading indicator of the unemployment rate,rose to by far its highest level since the bursting of the economic
bubble, indicating a strong upswing of Japan’s credit cycle. At thehttps://www.jef.or.jp/journal/

COVER STORY 2

CHART 1

Corporate savings rate & Consumer
Price Index

Weak

15

-2

10

-1

5

Deflation
0

0

1

-5

2

-10

3

-15
Mar-87 Mar-92 Mar-97 Mar-02 Mar-07 Mar-12 Mar-17

4StrongCHART 2

Diffusion index for lending attitude toward SMEs in BOJ
Tankan survey (credit cycle) & unemployment rate
25

1.5

20

2.0

15

2.5 Strong

10

3.0

5

3.5

0

4.0

-5
Inflation

Corporate savings rate (GDP%, 4QMA)

CPI (Ex. Fresh food, CT hike, yoy%, RHS)

4.5

-10

5.0

-15
-20
-25
Mar-97Weak

5.5
Mar-02Mar-07Mar-12Mar-17

6.0

BOJ Tankan SMEs lending attitude DI
Unemployment rate (%, RHS)

Sources: Bank of Japan, Cabinet Office, Ministry of Internal Affairs and Communications,
Société Générale Securities Japan Limited

Sources: Bank of Japan, Ministry of Internal Affairs and Communications, Société Générale
Securities Japan Limited

same time, Japan’s economy had been undergoing a shift from afocus on manufacturing industries to service industries, partly driven
by the developments in information technologies. The reassuring
sense that funds could be procured at any time lowered the need tocarry cash on hand and other idle funds, and instead increase
investment. This helped to accelerate the growth of new businesses
and services. At the same time, the large amount of funds available
helped to increase hiring, driving the unemployment rate to by far its
lowest level since the collapse of the bubble economy.
This period also had a tailwind from strong economies overseas.
Fiscal policy, which was starting to be reined in after an expansionary
period for the recovery from the 2011 Great East Japan Earthquake,was bolstered by proactive outlays at the start of Abenomics 1.0,
adding to the recovery in demand. Nevertheless, with concerns of anaging population far into the future and the economy showing a bitof strength, taxes including the consumption tax and social
insurance premiums were raised and austere fiscal policies wereintroduced before the economy completely exited from a state of
weak domestic demand and deflation. This caused Abenomics 1.0 tostall (Chart 2).

was weak). Net domestic fund demand is the force that drives thecreation of money by increasing the flow of money and growing themonetary economy. Money flowing through the economy includes
household income increasing. However, the reduction in net
domestic fund demand meant that the reflationary cycle (themonetary economy’s strength to expand) was weak. With money notexpanding, there was no real sense of an economic recovery. A
contractionary fiscal policy placed a major burden on households.
Concurrently, weak spending by companies and the governmenttranslated to tepid wage growth. As a result, this kept demand weak
and prevented the economy from completely exiting from deflation.
Furthermore, the lack of net domestic fund demand made itdifficult for the liquidity provided by the BOJ through its monetaryeasing programs to have a positive impact. The lack of fund demandcaused money injected to remain in the financial institutions’ current
account balance at the BOJ. This limited the effect of the BOJ’squantitative easing program.
The slowing flow of funds to households, combined with theburden from contractionary policies including the consumption tax
hikes, increased dissatisfaction among the voting public. This led topopulist-style policies to emerge and confidence in the government
to weaken. Furthermore, over-relying on monetary policy in light of alack in net domestic fund demand exacerbated the negative side
effects of monetary easing policies such as increasing the pressure
on the management of financial institutions in a world of prolonged
ultra-low interest rates.
As long as the net domestic fund demand does not grow to thehuge extent seen during the bubble period (roughly 10% of GDP),major problems such as spikes in interest rates or the government
crowding out private investments as they compete for funds should
not materialize. The need for immediate contractionary fiscal policy

Exiting from Deflation Requires Expansionary
Fiscal Policy
If solid economic growth is to be maintained even with weakcorporate spending and demand, government spending could offset
such weakness. With fiscal policy having turned austere, however,
the abnormally high level of positive corporate savings rates could
not be offset by fiscal spending. As a result, net domestic funddemand (the corporate savings rate plus the fiscal balance), whichshould be negative (i.e. excess fund demand), declined (spending

Japan SPOTLIGHT • November / December 2020

9

COVER STORY 2

CHART 3

CHART 4

Net domestic demand for funds

Capital investment cycle & corporatesavings rate

(reflationary cycle)
15
10

Weak

5

19

-12

18

-8

17

0

16

-5

15

-10

Strong-15
Mar-81Mar-91Mar-01Mar-11

Mar-21Net Domestic Fund Demand (Fiscal Bal. + Corp. savings rate, GDP%)
Corporate savings rate
Government savings rate (Fiscal balance)

14-4Strong

0
4
8
12

Weak

13
16
Mar-88 Mar-93 Mar-98 Mar-03 Mar-08 Mar-13 Mar-18 Mar-23
Private non-residential investment (GDP%)

Corporate savings rate (GDP%, 4QMA, RHS)

Sources: Bank of Japan, Cabinet Office, Société Générale Securities Japan Limited

Sources: Cabinet Office, Bank of Japan, Société Générale Securities Japan Limited

should not strengthen either. However, a complete exit from deflation
was hindered by simple concerns over the size of the fiscal deficit
and government debt. This led to a mistaken contractionary fiscal
policy to be implemented, which did nothing but reduce the net
domestic fund demand, the power to reflate the economy. Bolsteringa reflationary cycle and emerging from deflation require inducementof an appropriately large net demand for funds (Chart 3).

Businesses are also rolling out new products and services. Japan’sbusinesses are looking to expand.
With the capex cycle leading the way, over time the corporatesavings rate should return to a normal negative level (reviving
demand for funds by Japan’s businesses) from the current abnormal
positive level. This in turn should help remove the downward
pressure on aggregate demand. The demand for funds should
accelerate the flow of money and cause money to expand. As aresult, Japan should be able to exit from its persistent state of weakdomestic demand and deflation (Chart 4).

Budding Exit from Deflation
Even though the gears are moving slowly, the move toward acomplete exit from deflation is continuing. The credit cycle has
swung to the upside and the size of the business pie (i.e. nominal
GDP) is gradually beginning to expand. Wages and prices have also
begun to trend upward. Against this positive backdrop, if
expectations for strong future economic growth accompanied byhigher prices increase, corporate investment should increase as well.
This would create an opportunity for an exit from a state ofpersistent weak domestic demand and deflation. Previously, private
sector investment had been unable to rise above 16% of GDP (thesize of the economy), indicating investment activity remained weak.
However, over the past few years, the ratio has surpassed 16%
continuously for the first time since the collapse of the bubble,
indicating that investment activity has started to increase. Japan’s
capex cycle has finally turned upward.
These are the buds of emerging from deflation. Companies areexperiencing labor shortages, and the need to rely more heavily on
capital is increasing. This has helped to accelerate the developmentof new technologies including artificial intelligence (AI), the Internetof Things (IoT), robotics, big data, and 5G. Budgets for urban
redevelopment and for research and development are also growing.
10 Japan SPOTLIGHT • November / December 2020

Exiting from Deflation by Way of Fiscal Expansion
However, Covid-19 has hindered the exit from deflation. The
pandemic has heightened concerns of an economic downturn,bringing household and corporate activity to a standstill, and createdrenewed uncertainty about whether the economy will be able torebound and exit from deflation. The top priority of the government’s
and BOJ’s economic policies is to not stifle the credit cycle. If thecredit cycle is not impeded during the crisis and the expansion
mechanisms seen to date for business and hiring are maintained, theeconomy will be able to rebound as the pandemic abates and avoid
falling into an L-shaped recovery.
With the momentum for new technological development
continuing during the pandemic and support from the government’s
economic policies remaining strong, the accelerated push for new
information technology and innovation should spur further
innovation in the future. As a result, if the capex cycle further swings
to the upside, indicating the further revitalization of investment
activity, the economic recovery post-Covid-19 will shift from a
gradual U-shaped to a more rapid V-shaped recovery. At this point,

COVER STORY 2

TABLE 1

Shapes of the economy from the newcoronavirus pandemic

TABLE 23 cycles & shapes of the economy① If the credit cycle (diffusion index for lending attitude

I-shaped (continued decline): Collapse of economic structuresdue more to the epidemiologic issue of an explosive spread of
infections than to economics

toward SMEs in the BOJ Tankan survey) does not stall, theeconomy avoids an L-shape and proceeds to a U-shape.

L-shaped (bottoming out with no recovery): Companies reembark on deleveraging and restructuring, the environment forhiring and incomes worsens, leading to a return to deflation

percentage of GDP) rebounds, the economy changes from a
U-shape to a V-shape.

U-shaped (gradual recovery): Economy recovers gradually
supported by a strong hiring and income environment, but
emergence from deflation remains far off in the absence ofadditional forces to boost the economy
V-shaped (immediate return of recovery strength): A strong
economic recovery on growth in corporate capital investment
driven by things like new information technologies. Return tooriginal path of emergence from deflation on strength of policy
mix of fiscal expansion and monetary easing.
W-shaped (2nd drop on re-emergence): Epidemiologic issues
including whether or not vaccine is successfully developed or
herd immunity achieved, or risk of virus mutation
Source: Compiled by the author

the economy should fully return to its previous path toward acomplete exit from deflation (Table 1).
To this point we have looked at how the reduction in net domestic
fund demand, the driving force behind the expansion of money andthe monetary economy, led to a weak reflationary cycle and hindered
the Japanese economy from exiting from deflation.
However, facing what can be considered the worst postwar
economic downturn, the government has put aside the conventional
thinking that “fiscal deficits always strengthen the risk of higher
interest rates”, and has embarked on a series of large-scale fiscal
stimulus to overcome the crisis. With fiscal expansion and corporate
activity reviving, net domestic fund demand, the force that createsaggregate demand by increasing the flow of funds in the economy,
should pick up. In other words, the reflationary cycle should swing
to the upside. With the BOJ monetizing this revived demand,
Abenomics 2.0 should start to operate.
Through a continued policy mix of large-scale fiscal expansion andmonetary easing, Abenomics 2.0 should accelerate the upswing of
the reflationary cycle, something missing from Abenomics 1.0, andreturn the economy toward completely exiting from deflation.
With corporate savings rates returning to their normal negative
level in a few years, excess savings will no longer depress aggregate
demand. That said, as long as the reflationary cycle remains weak,
the revival of corporate activity will remain weak regardless of how
impressive the government’s growth strategy is. If Japan’s
reflationary cycle is first raised through fiscal expansion and money
starts to grow again, companies will likely react by increasing theirspending. This would pave the way for the government to declare② If the capital investment cycle (real capital investment as③ If the reflationary cycle (net demand for funds) picks up,

Abenomics 2.0 is operating.
Source: Compiled by the authorthat Japan has completely emerged from deflation. The government
will likely declare a complete exit from deflation when the corporatesavings rate returns to its normal negative level, i.e. when the
downward pressure on aggregate demand is eliminated and the riskof returning to deflation even during the next recession is also
removed (Table 2).
The ideal level of net domestic fund demand can be seen as
roughly 5% of GDP (¥30 trillion). Considering the large rise in thecorporate savings rate due to Covid-19, fiscal expansion to date is
now finally at a level sufficient to revitalize net domestic funddemand. Thus, the risk that Japan’s fiscal situation remains unstable
is low. With net domestic fund demand not overheating, there is stillmuch room for fiscal expansion to provide further support forhouseholds and companies and bring about a V-shaped economic
recovery. Maintaining an accommodative fiscal policy (maintaining
the increased level of fiscal outlays) to keep the desired level of net
domestic fund demand until the economy emerges from deflation
will be critical.
Japan’s fiscal policy stance until recently has been to adjust the
fiscal balance so that net domestic fund demand remains around
0%. However, such a policy stance is too constrictive for the
economy. Instead, the government should aim to guide net domestic
fund demand to roughly 5% of GDP. In other words, fiscal spending
could increase persistently by around 5% of GDP (¥30 trillion) on theassumption that the cyclical elements of fiscal policy do not change.
In light of Covid-19, the government seems to be using that available
surplus. In the future, once programs aimed at problems
surrounding Covid-19 can be reduced, the increase in spending
could be shifted to other programs such as education, infrastructure
investment, support for households (programs like a basic income),
and the expansion of the medical and social welfare structures.
One material risk that remains is policy makers shifting back to an
austere fiscal policy stance prematurely on the back of a simple
reactionary mindset to the latest fiscal expansion, and the underlying
belief that the size of the fiscal deficit and government debt poses a
significant risk. Such moves could return fiscal policy to one thataims to excessively constrict fiscal spending, and suppress therevival of net domestic fund demand, hindering the move toJapan SPOTLIGHT • November / December 202011

COVER STORY 2

completely exit from deflation.
A coronavirus tax, similar to the taxes introduced to fund therecovery from the 2011 earthquake, or another increase in the
consumption tax would cause major damage to the economy andhouseholds. An ideal way to reduce the deficit and debt would be tostimulate corporate activity and bring the corporate savings rate
down to roughly 5%. The revival of private economic activity would
lead to a natural increase in tax revenue with fiscal tightening used tocontrol the overheating of private demand. Fiscal soundness througheconomic growth would reduce the fiscal deficit while maintaining adesired level of net domestic fund demand. The failure of Japan’s
economic policy and the resulting decades of deflation were due toexcessive savings in the economy, primarily from an abnormal
positive corporate savings rate and insufficient demand.
Policymakers will need to recognize their past mistakes that
excessive emphasis on a contractionary fiscal policy, such as a focus
on a neutral fiscal balance, reduced the net domestic fund demand
excessively, which depressed the reflationary cycle. This exacerbatedand prolonged Japan’s deflation and an economic downturn. With
corporates and governments not being in their natural state,households were forced to carry the burden of these mistakes.

The Shape of Inflation After the Pandemic
To forecast the direction of prices after Covid-19, one needs tolook closely at the differences in the trends, rather than at short-term
variables. For the near future, there will continue to be a sense of
caution with regard to the spread of Covid-19 and the government
will continue to call for containment measures, which will press on
economic activity. This will cause the recovery in demand – and forservices in particular – to be gradual. In the absence of major
physical damage to the supply side (e.g. manufacturing facilities andsupply chains) like that seen in the aftermath of the 2011 earthquake,the supply side of the economy will remain intact. Thus, a state ofexcess supply will put downward pressure on prices. However, at thesame time, lower prices will increase households’ real incomes,
which in turn will help support demand. Normally prices drop when
demand weakens compared to supply.
However, post-Covid-19, the state of excess supply will likely
disappear. With people’s lives returning to normal, demand should
recover. Furthermore, solid hiring and household income remaining
firm should further help demand to recover.
In light of Covid-19, there is a possibility that businesses willreassess the risks they carry in terms of their current global
manufacturing structure. In order to become more resilient to future
shocks of a similar nature, businesses could shift and diversify their
supply chains and manufacturing processes. In exchange for morestable supply chains, including more inventory stockpiles as a formof crisis management, businesses could demand a premium. At thesame time, awareness of social distancing and other measures toprevent the spread of Covid-19 will constrict supply, primarily for
12 Japan SPOTLIGHT • November / December 2020

services. Companies will emphasize maintaining their profit margins
over just sales volumes or market share. Thus, businesses will
become less willing to cut prices as a response to temporary
weakness in demand, making price elasticity more inelastic. A
persistent state of excess demand could further accelerate the shift
from deflation to inflation.
The strength or weakness of inflation in the post-Covid-19 world
could be completely different depending on whether decisions are
made with or without taking net domestic fund demand into account.
A continued shift in fiscal policy from contractionary to expansionary
would bring about a change from the deflationary trend to date to atrend of inflation, especially under a policy-mix approach.
The government and the BOJ have been greatly expanding theirpolicy of providing liquidity to companies under a policy of making
an all-out effort to protect the credit cycle. With the latest data
indicating a continued upswing in the credit cycle, an L-shaped
economy has been avoided. Meanwhile, capex continues tosignificantly outperform real GDP, keeping the ratio of real nonresidential investment as part of real GDP at a post-economic bubble
high. Although near-term business sentiment has taken a hit,businesses’ need for greater productivity remains intact, in partdriven by tighter labor supply from an aging population trend.
With companies having determined that the effect of Covid-19 will
be temporary and with funding remaining available as financial
institutions’ lending attitudes remain strong, there is no reason forbusinesses to significantly shrink their capex. Thus, Japan’s capex
cycle will likely remain swinging to the upside. If capex remains
strong even after Covid-19, it will further strengthen the economic
recovery created by a robust credit cycle. The capex cycle will help
the recovery shift from a gradual U-shape to a more rapid V-shape.
Furthermore, even though Prime Minister Shinzo Abe has resigned,
his successor, Prime Minister Yoshihide Suga, will likely carry on thegeneral policy framework of Abenomics of pulling Japan completely
out of deflation and stagnant growth. Even with the change at thetop, Abenomics 2.0 will likely start as Covid-19 settles down.

Global Strength for Inflation
Similar to Japan, countries around the world have embarked onhuge fiscal expansion to cushion the effects of Covid-19 on theireconomies. Fiscal deficits have grown significantly across the world.
With strong policy mixes of fiscal expansion and monetary easing,major economies, including Japan, the US, and the Eurozone have allbut eliminated bottlenecks for money to expand. The possibility has
emerged that the global economy will experience inflation, which
supports the further expansion of economic activity, instead ofdeflation, which weighs down on economic activity.
In the US, with a growing fiscal deficit combined with a small
increase in the household and corporate savings rates, the current
account deficit will grow. A current account deficit would mean thatthe supply of dollars, the key currency in the global economy, from

COVER STORY 2

the US to the rest of world will expand. An increase in the US current
account deficit combined with the Fed continuing its monetaryeasing policies will further expand the global supply of dollars. To
date, the US’s net domestic fund demand has remained strong, but
as corporates saved and the government reduced the fiscal deficit,
net domestic fund demand shrank. However, as households
deleveraged after the crash of the housing bubble and increased theirsavings, the current account deficit shrinking over the same period
acted as the counterbalance. In Japan, against the backdrop of the
problem of excessive corporate savings, a contractionary fiscal
policy has failed to offset excessive savings. This has led toaggregate demand being depressed and has been one of the main
factors behind Japan’s deflation to date. Today, a policy mix of fiscal
expansion sufficient to offset excess corporate savings and monetaryeasing monetizing net domestic fund demand is reviving the
expansion of the monetary economy. Stimulating net domestic funddemand could also eliminate the bottleneck preventing funds fromflowing to households and hindering the pick-up in private consumer
demand. Even with the decline in net domestic fund demand, Japan’scurrent account balance has remained stable. Instead, households’
savings have declined significantly, indicating that households
instead of the global economy have taken on most of the burden of
the decline in net domestic fund demand.
In the Eurozone, rather than households, the effect of the decreasein net domestic fund demand appears to have been passed on toother countries in the form of a large increase in the international
current account surplus. In the Eurozone, strong underlying
expectations for inflation are making it difficult to reduce wages.
Furthermore, the euro has remained at a level which has exacerbatedthe current account surplus for export powerhouses such as
Germany. Stimulating net domestic fund demand through fiscal
expansion could begin to reduce the large current account surplus,
which grew rapidly by taking demand from other countries, as
domestic demand revives.
In all three economies, the policy mix and the subsequent
expansion of money could lead to a rise in asset prices and trigger ashift from a global deflationary trend seen so far to a global
inflationary trend.

Consequences of Power Struggle Between US& China
Even after Covid-19 calms down, markets appear to have a sensethat the struggle between the US and China for global political andeconomic supremacy remains a source of uncertainty. Within theeconomic environment of global deflation, China has grown tobecome an economic superpower. Will it be able to maintain thatstrength even after the global economic environment becomes
inflationary? Is China’s state capitalism more efficient than the freemarket capitalism of Japan and the US, and effectively able to control
inflationary pressures?

Global deflation – an economic environment characterized byexcessive savings (a surplus of capital) – allows for inefficient statedirected investment activity. These policies which partially increase
aggregate demand artificially through inefficient policies can be seen
as having the power to expand the economy. However, a global
inflationary economic environment calls for more efficientinvestment activity. This could potentially cause state-directedeconomic structures that incorporate structural inefficiencies tobecome considerably inferior to free-market capitalist economic
structures that incorporate autonomous, effective mechanisms.
Thus, in order to win the battle for global political and economic
supremacy, US policymakers could prefer a more advantageous
global inflationary economic environment.
Another reason that free market capitalist economies can gainsupremacy through inflation is their ability to export their own
currency. By running a persistent current account deficit, the US
provides dollars to the rest of the world. This increase in the supplyof dollars could trigger a rise in asset prices, leading to a turnaroundin the global deflationary trend to date to a global inflationary trend.
However, state-run economies like China that also worry about
potential capital flights will have a hard time exporting theircurrencies. If the yuan becomes a global currency, it will risk creating
an economy that will have to run a persistent current account deficit,
something state-run economies cannot manage effectively. Thus, theability to maintain a dollar-based key currency system through freemovement of dollars in and out of the US gives it a key advantage inthis struggle for global economic supremacy.
A considerable amount of time will be needed before clear signs ofglobal inflation appear. Remaining in a mindset of persistent global
deflation could raise the risk of failing to recognize the shift toward
global inflation as a result of changes in the global economic
environment, including policy interventions by various governments.
A global change in direction from deflation to inflation could provide
a strong boost to Japan as it moves to completely exit fromdeflation. The fact that the risk of uncontrollable inflation remains
small will allow Japan to maintain its policy mix until the very end
and to solidify the shift to a path of sustained economic growth.
Nevertheless, a premature shift back to contractionary fiscal policies
after Covid-19 is contained, driven by excessive fears regarding thestate of government debt, could change the current tailwind to amajor headwind.

Takuji Aida has been Chief Japan Economist at Société Générale Securities
Japan since August 2013 and has been highly ranked in various economist
rankings. He has extensive experience as an economist at several financial
institutions such as UBS Securities Japan, Brevan Howard (Japan), Barclays
Capital Japan, and Merrill Lynch Japan Securities.

Japan SPOTLIGHT • November / December 202013