Speech By Kiyohiko Nishimura on Japan's Economy, Monetary Policy (Bank of Japan, 4/21/2010)

Below is a speech on 4/21/2010 made by Kiyohiko Nishimura, Bank of Japan's Deputy Governor on Japan's economy and monetary policy.  It was a meeting with business leaders in Miyagi.  I quoted below the paragraph on recent price developments but find his outlook on current economic conditions in the PDF.
"Price Developments in Japan

I will now talk about price developments.

The year-on-year rate of change in consumer prices has been declining, while the pace has been moderating since last August to around -1 percent recently.

We hear from firms that it is difficult to raise sales prices as consumers are sensitive to prices due to their tight purse strings, and as competition is harsh among firms. The Tankan showed that output prices have not risen, compared with the improvement in business sentiment and the rise in input prices.

Nevertheless, it can be said that some beams of light are starting to break through a thick cloud of deflation.

First, there is a subtle change in firms' price-setting behavior and consumers' purchase behavior. With your cooperation, the Bank conducted a survey on firms' price-setting behavior at the beginning of this year. The results, which were published in our January Regional Economic Report, showed that there were signs in some firms to avoid endless price competition and try to differentiate in aspects other than prices. The impression obtained through various surveys and interviews is that there are subtle and gradual signs on the consumers' front to purchase quality products by paying reasonable prices.

Second, the effects of exports and production bottoming out in the early spring of 2009, and the economy as a whole picking up since then, will gradually materialize from now on. A rule of thumb is that there is about one year lag until changes in the economy affect the inflation rate. In that sense, it could be said that from the middle of 2009 to the spring of 2010 was a period in which the effects of the economic plunge from the autumn of 2008 to the spring of 2009 put strong downward pressure on prices with a time lag. And the effects of the pickup in the economy since the spring of 2009 can be considered to spread over to prices only from now on.

Third, reflecting the aforementioned changes in firms' price-setting behavior and the lagged effects of the pickup in the economy, there are some changes in the trend of prices. Have you ever heard of expressions such as the consumer price index excluding fresh food or the consumer price index excluding food and energy? Those are the price indexes that, in order to gauge the trend changes, exclude the swings by temporary factors such as weather and commodity price fluctuations, and the year-on-year rate of decline in those price indexes has been moderating. There is also a way to automatically exclude a certain portion of items that register significant price fluctuations. The consumer price index compiled in that way is called the "trimmed-mean" consumer price index. The year-on-year rate of decline in consumer prices in terms of trimmed mean index accelerated toward the autumn of last year, but it has been moderating recently for three consecutive months.

Taking those into account, as the economy is likely to continue picking up and the aggregate supply and demand balance improves, the moderating trend in the decline in prices is expected to continue.

Of course, there are uncertainties about the outlook for prices. Because of that, it is necessary to surely confirm the steps toward overcoming deflation. In the following, I will raise two points that warrant attention in considering the outlook for prices." .....[Continue reading at Bank of Japan's website http://www.boj.or.jp/en/type/press/koen07/ko1004d.htm]