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Japan’s Central Bank Uses Psychology to Spark Inflation

The Bank of Japan is trying to build up public expectations of inflation
A customer browses vegetables at a supermarket in Tokyo, Japan on  April 9
A customer browses vegetables at a supermarket in Tokyo, Japan on April 9 Photograph by Tomohiro Ohsumi/Bloomberg

Japan’s long battle against deflation may finally be ending—or so Japanese officials want us to believe. Policymakers know that public expectation of more deflation can become self-fulfilling, so they’re trying to change the way ordinary Japanese think about prices. They see the fight against deflation not just as one that involves measures like quantitative easing, but also psych warfare: Once Japan’s consumers and business leaders believe prices will start rising, there’s a better chance people will go out and spend, putting pressure on prices to go up.

Hence the speech on April 18 by Ryuzo Miyao, a member of the Bank of Japan’s policy board who said deflation will end in the current fiscal year, which started on April 1. “The achievement of 1 percent inflation in fiscal 2014 has come into sight,” Miyao said. “The public’s inflation expectations will rise gradually, and in this situation the inflation rate is likely to rise above 1 percent during fiscal 2014.”