TOKYO Even as cost-push factors increase inflation, global central banks must be vigilant to the risk of Japanification, in which their economies are facing prolonged low inflation and stagnation, said Bank of Japan BOJ Deputy Governor Masazumi Wakatabe.
He said that a number of structural factors could weigh on the neutral rate or the rate at which monetary policy is neither stimulating nor restricting growth across the globe.
Wakatabe told an academic conference on Saturday that the main challenge for central banks would be to reduce real interest rates to reflate their economies.
When looking at history, the mild inflation regime has not ended and the potential danger of prolonged economic stagnation, or 'Japanification', has not been dispelled, he said.
Wakatabe, who is known as an advocate for aggressive monetary easing, said Japan's long experience with deflation shows that it's quite hard to eradicate fears of deflation.
In 2013, BOJ Governor Haruhiko Kuroda implemented a massive asset-buying programme to pull Japan out of a decade of deflation, which was blamed for prolonging its economic stagnation because firms and households hoarded cash instead of spending it.
The BOJ shifted its policy in 2016 to a policy targeting interest rates after heavy money printing failed to raise inflation to a 2 per cent target. Even though rising raw material costs push inflation above the target, it continues to maintain ultra-low rates.
Wakatabe, whose five-year term ends in March, has stressed the need to keep monetary policy ultra-loose to put a lasting end to deflation.