From Asia Times via MENA FN, June 12:
China's“deflation-is-over” narrative is getting louder, but the foundations are still shaky.
Consumer prices rose 1.2% year-on-year in May, while producer prices jumped 3.9%, lifted by higher costs for energy, semiconductors and metals. To many economists, this is the clearest sign yet that the 2025 deflation scare is giving way to reflation.
But Japan's long struggle shows how stubborn deflationary psychology can be. And it's far from clear that Beijing is delivering the structural reforms needed to ensure China's weak‐price era is truly ending.
Two reforms stand out - and neither is being pursued with urgency. First, resolving the deep housing crisis, which increasingly resembles Japan's 1990s bad‐loan spiral. Second, building a real social safety net so 1.4 billion citizens feel confident enough to spend rather than hoard savings.
These priorities are tightly linked. With roughly 70% of household wealth tied to property, stabilizing the real‐estate market across China's 70 largest cities is essential for reviving consumption and sustaining 4.5%- 5% growth.
But the longer Xi's government acknowledges these pressures while avoiding decisive action, the more a deflationary mindset takes hold - and the harder it becomes to shake.
Japan is the cautionary tale. Even as the Bank of Japan prepares to lift rates to 1% next week - the farthest from zero in more than three decades - deflationary undercurrents still run through the economy.
On paper, Japan looks like it has finally escaped its low‐price trap. The BOJ expects inflation to reach 2.8% this year, suggesting reflation is taking hold. But beneath the headline, real wages remain negative, with pay packets consistently trailing price gains and domestic demand weakening as a result.
The result is a slow‐burn form of stagflation, and Tokyo has yet to deliver the structural reforms needed to close the gap between rising prices and stagnant household incomes.
“For the Japanese economy to fully break free from its long-standing deflationary mindset,” says Toshihiro Nagahama, economist at the Dai-ichi Life Research Institute,“it's imperative for the government and the central bank to align, articulate their risk assessments, maintain honest and transparent dialogue with financial markets, and resolutely execute bold, long-term growth investments.”....
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