Japan has been jolted by a dramatic spike in rice prices, which surged by 101.7% year-on-year in May 2025 – the most significant increase in over fifty years.
This sharp rise in the cost of the country’s staple food has contributed heavily to Japan’s inflation, which jumped to 3.7%, marking its highest point since January 2023.
The Bank of Japan (BOJ) now faces mounting pressure, as this marks the 38th consecutive month inflation has surpassed the Bank’s 2% target.
Notably, the ‘core-core’ inflation rate, excluding fresh food and energy rose to 3.30%, an indication that broader cost pressures are sticking.
The government has begun releasing emergency rice stockpiles in an attempt to dampen prices, but analysts remain cautious.
With rice accounting for nearly half of Japan’s core inflation, its influence stretches well beyond supermarket aisles. A continued rise could affect everything from packaged goods to restaurant prices.
Despite calls for tightening policy, the BOJ has opted to keep interest rates at 0.5%, citing expectations of inflation easing in the coming months.
However, with geopolitical tensions and supply chain factors still looming, the outlook remains uncertain.
Switzerland has officially re-entered an era of zero interest rates, following a 0.25% cut by the Swiss National Bank (SNB) on 19th June 2025.
The move, though widely expected, marks a significant shift in monetary policy as the nation grapples not with inflation – but deflation.
Consumer prices in May dipped 0.1% year-on-year, driven largely by the enduring strength of the Swiss franc.
The SNB cited diminished inflationary pressure as the rationale behind the cut and indicated it remains focused on long-term price stability.
Chairman Martin Schlegel emphasised that short-term negative inflation readings weren’t the primary motivator. Instead, the Bank revised its inflation forecast down to 0.2% for 2025 and 0.5% for 2026.
Switzerland’s strong currency continues to weigh heavily on imported goods prices – an especially potent factor in a small, open economy.
Analysts suggest the SNB may go lower if inflation fails to rise, sparking speculation about a return to negative rates.
This development sets Switzerland apart from other major economies still battling inflation, underscoring the unique challenge of managing deflation in a world accustomed to rate hikes.
The next SNB policy decision is due in September 2025. Until then, all eyes remain on the franc – and the fallout.
China’s economic landscape is facing mounting challenges as exports to the United States plummet and consumer prices decline, sparking fears of deflation.
The latest trade data reveals that Chinese exports to the U.S. fell by 34.5% in May2025, marking the sharpest drop in over five years. This decline comes despite a temporary trade truce that paused most tariffs for 90 days.
China’s consumer prices have continued their downward trend, raising concerns about deflation and its long-term impact on the economy.
The sharp fall in exports is largely attributed to high U.S. tariffs and weakening demand. While China’s overall exports grew by 4.8%, shipments to the U.S. suffered significantly, reflecting the ongoing trade tensions between the two economic giants.
Imports from the U.S. also dropped by 18%, further shrinking China’s trade surplus with America. In response, Chinese exporters are shifting their focus to other markets, particularly Southeast Asia and Europe, where demand remains relatively strong.
China’s CPI reading
At the same time, China’s consumer price index (CPI) fell by 0.1% in May 2025, deepening concerns about deflation. Deflation, the opposite of inflation, can lead to lower corporate profits, wage cuts, and job losses, creating a vicious cycle of economic stagnation.
The decline in consumer prices is largely driven by weak domestic demand, exacerbated by the ongoing real estate crisis. Many Chinese consumers are hesitant to spend, fearing further declines in property values and economic uncertainty.
China’s rare earth materials olive branch
China appears to have offered U.S. and European auto manufacturers a reprieve after industry groups warned of increasing production threats over a rare earth shortage.
China’s Ministry of Commerce on Saturday 7th June 2025 reportedly said it was willing to establish a so-called ‘green channel’ for eligible export licence applications to expedite the approval process to European Union firms.
Switzerland may be at risk of entering deflationary territory in 2025 due to the strengthening of the Swiss franc, which is challenging policymakers’ control over price growth.
The Swiss National Bank has lowered interest rates three times this year as of September, attributing the country’s declining inflation rate to the robustness of the safe-haven currency, as well as to falling oil and electricity prices.
Analysts increasingly believe that the Swiss National Bank may need to engage in foreign currency intervention to avert a deflationary scenario.
Furthermore, the central bank has adjusted its forecasts downward, setting the average annual inflation rate for 2024 at 1.2%, down from 1.3%, and anticipating a price growth of 0.6% in 2025, a decrease from the previously forecasted 1.1%.
In September 2024, China witnessed a decline in consumer inflation rates and an intensification of producer price deflation, despite efforts to implement additional stimulus measures aimed at reviving weak demand and stabilizing economic activity
The consumer price index (CPI) rose by 0.4% from the previous year, a slowdown from the 0.6% increase observed in August, as reported by the National Bureau of Statistics (NBS) on Sunday 13th October 2024. This increase was below the 0.6% rise economists had forecasted.
Month-on-month, the CPI remained unchanged, contrasting with the 0.4% increase in August and missing the expected 0.4% rise.
The producer price index (PPI) registered a year-on-year fall of 2.8% in September 2024, a sharper decline than the 1.8% decrease in the previous month and exceeding the 2.5% drop projected by analysts.
Deflation is an economic phenomenon characterized by a general decline in prices for goods and services. It occurs when the inflation rate falls below 0%, resulting in a negative inflation rate.
This means that the purchasing power of currency increases over time, allowing you to buy more with the same amount of money. It can be as damaging to the economy as inflation.
Consumer and Asset Prices: During deflation, both consumer and asset prices decrease, which might seem like a good thing because it increases the purchasing power.
Economic Impact: However, deflation can be harmful to the economy. It often signals an impending recession or hard economic times. If people expect prices to fall further, they may delay purchases, hoping to buy later at a lower price. This leads to reduced spending, which can cause producers to earn less, potentially leading to unemployment and higher interest rates.
Measurement: Deflation is measured using economic indicators like the Consumer Price Index (CPI), which tracks the prices of commonly purchased goods and services. When the CPI shows that prices are lower than in a previous period, the economy is experiencing deflation.
Causes: The main causes of deflation include a decrease in demand or an increase in supply. A decline in aggregate demand can lead to lower prices if supply remains unchanged. Conversely, an increase in supply can also cause prices to drop if demand does not increase accordingly.
It’s important to note that deflation is different from disinflation. Disinflation refers to a slowdown in the rate of inflation, where prices are still rising but at a slower pace than before.
Deflation can have complex effects on an economy, and while it may benefit consumers in the short term, it can lead to broader economic challenges.
Deflation, friend or foe?
Deflation, often perceived as a relief during times of high prices, is a complex economic condition that presents both benefits and challenges. It is defined by a general decrease in the price level of goods and services, leading to an increase in the real value of money. This means consumers can buy more for less, but this apparent advantage masks the potential dangers lurking beneath the surface.
The immediate effect of deflation is an increase in consumer purchasing power. As prices drop, money buys more, which can be particularly beneficial for individuals on fixed incomes. However, this boon is short-lived if deflation persists. Consumers, anticipating further price drops, may postpone purchases, leading to a decrease in consumer spending, the lifeblood of any economy. This reduction in demand can force businesses to lower prices further, creating a vicious cycle that’s hard to break.
Deflation can lead to a reduction in demand and can force businesses to lower prices, creating a vicious cycle that’s difficult to break.
Moreover, deflation can exacerbate debt burdens. As prices and revenues fall, the real value of debt increases, making it more challenging for borrowers to repay their obligations. This can lead to increased loan defaults and financial instability. For businesses, falling prices mean reduced profit margins, leading to cost-cutting measures such as layoffs, reduced investment, and even bankruptcy.
Causes
The causes of deflation are multifaceted, often stemming from a decrease in aggregate demand or an oversupply of goods. Technological advancements, while boosting productivity, can also contribute to deflation by lowering production costs and increasing supply faster than demand. Additionally, a strong currency can make imports cheaper, contributing to lower prices domestically.
Tools
Central banks and governments typically combat deflation with monetary and fiscal policies aimed at stimulating demand. Lowering interest rates, increasing government spending, and quantitative easing are common strategies employed to inject money into the economy and encourage spending.
While deflation can initially seem like a welcome development, its long-term effects can be detrimental to economic health. It is a delicate balance that policymakers must navigate carefully to ensure stability and growth in the economy.
During this period of inflationary pressure, no country is beyond the grasp of deflation.
A message for governments and central banks around the world – don’t push too hard!
China’s consumer price index (CPI) fell by 0.3% in August from a year ago, while the producer price index (PPI) fell by 4.4% last month. This is the first time since February 2021 that the CPI has fallen, and the 10th consecutive month that the PPI has contracted. This indicates that China is experiencing deflation pressure as demand in the world’s second-largest economy weakens.
Factors that contribute to the deflation risk
A prolonged property market slump, which reduces investment and consumption.
A plunging demand for exports, due to the global economic slowdown and trade tensions with the United States.
A subdued consumer spending, due to the coronavirus pandemic and rising unemployment.
Deflation can have negative effects on the economy
Lowering profits and incomes for businesses and households.
Increasing the real value of debt and making it harder to repay.
Reducing incentives for investment and innovation.
Creating a downward spiral of falling prices and demand.
The Chinese government and the central bank have taken some measures to stimulate the economy and prevent deflation.
Cutting interest rates and reserve requirement ratios for banks.
Increasing fiscal spending and issuing special bonds for infrastructure projects.
Providing tax relief and subsidies for businesses and consumers.
However, these measures have not been enough to offset the deflationary pressure, and some analysts expect more monetary easing and fiscal support in the coming months.
Deflation definition
Deflation is the opposite of inflation. It means that the prices of goods and services are going down over time. This may sound good for consumers, who can buy more with the same amount of money. But deflation can also have negative effects on the economy.
Deflation can be caused by a decrease in the supply of money and credit, a fall in demand, or an increase in productivity. To prevent or reverse deflation, the central bank and the government can use monetary and fiscal policies to stimulate the economy, much the same as we are now seeing to deal with ‘inflation’.
