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Home Publications Blogs Beat the Press Deflating the Japanese Horror Story

Deflating the Japanese Horror Story

Sunday, 17 October 2010 07:40

The NYT devoted a lengthy piece to telling readers how bad things in Japan have been since its bubbles collapsed in 1990. It gets many things badly wrong.

First and most importantly, Japan is actually considerably wealthier on average today than it was in 1990, contrary to the implication of this article. According to the IMF, per capita income is 16.4 percent higher in Japan today than it was in 1990. This is considerably less than the 21.5 percent growth in the UK over this period or the 36.6 percent increase in the United States, but it is still a substantial gain in living standards. It is also worth noting that Japan's gain in per capita income was accompanied by a considerable shortening in the ratio of hours worked to population (shorter workweeks and more retirees).

However the biggest flaw in the piece is its obsession with deflation. Japan's has suffered from deflation in the last two decades, but the rate of price decline has always been very gradual. Only in 2009 did it even exceed 1.0 percent. (It is projected to be larger than 1.0 percent this year.)

It makes very little difference to an economy whether prices are falling by 0.5 percent or rising by 0.5 percent. The argument that people put off purchases because they see prices falling is just silly. If prices are declining at the rate of 0.5 percent a year, then someone considering the purchase of an $800 refrigerator can save $4 by waiting a year. It is unlikely that these sorts of savings would have much impact on even the purchase of a big ticket item; it's inconceivable that they would have any impact on the purchase of more every day items like food and clothing.

The real issue is simply that Japan's inflation rate has been too low. In this sense, a 0.5 percent deflation rate is worse than a 0.5 percent inflation rate. But a 0.5 percent inflation rate is also worse than a 1.5 percent inflation rate. A low inflation rate, whether positive or negative, keeps real interest rates higher than would be desirable in a severe downturn. It also prevents the economy from inflating away the debt burden left over from the housing bubble.

This point is important because many people wrongly believe that the United States will only be suffering from a problem of too low inflation if the inflation rate actually turns negative and we have deflation. This is not true. The inflation rate in the United States is already a level that is hampering growth. Any further drop in the inflation rate will make the situation worse but there is no importance to crossing zero.

One final point worth noting: this article implies that Japan's low birthrate is a bad thing. Actually, Japan is a very densely populated country. This is why house prices are so high. If its population declined then housing prices would fall. (This is a sophisticated economic concept known as "supply and demand.") A lower population would also mean less greenhouse gas emissions for those who care about the future of the planet. For these reasons, a low birthrate could help Japan in the future.

Comments (11)Add Comment
written by skeptonomist, October 17, 2010 8:37
Historically, population growth in most organisms including humans has been something like price appreciation of houses, stocks, tulips, etc; it has built up at what seems to be a favorable and prosperous rate until there is a devastating crash as resources are exhausted. This is how "free markets" work in nature, not just in human economics.
..., Low-rated comment [Show]
written by purple, October 17, 2010 10:51
Japan's unemployment rate never crossed 6% at the height of their crisis.
written by Ralph Musgrave, October 17, 2010 11:23
The argument that inflation is desirable because it enables a lower real interst rate is weak in that altering interest rates is not a good way of regulaging aggregate demand. Reasons are thus.

1. Potential investors look at long term rates, not short term rates, and the former are not much influenced by letter.

2. In a recession, investment is exactly what is not needed in that in a recession there is an excess of capital equipment lying idle.

3. Interest rate changes are distortionary in that if they only work via entities that are significantly reliant on variable rate loans.

4. As to credit card spending, the evidence is that this is not much influenced by short term rates.

For the supporting evidence, see here: http://ralphanomics.blogspot.c...n-cut.html
written by Miracle Max, October 17, 2010 11:37
I noted the article's chagrin at observation that the Japanese younger generation had failed to become addicted to buying stuff.

P.S. izzatzo, you are an imbecile.
Failing Prices
written by NewsFromAnnArbor, October 17, 2010 11:51
I've never bought the argument that falling prices produced an incentive to defer purchases. I think the explanation has more to do with falling housing prices making people poorer and fear of job loss. Also, the low inflation rates co-inside with the type of situation we have now: banks borrow money from the Fed at 0.25% and invest in 10 year T-bills paying 2.35%; the banks don't loan and the economy comes to a standstill.
written by Mich, October 17, 2010 1:08
"It also prevents the economy from inflating away the debt burden left over from the housing bubble."
Yeh thanks, make the people who didn't participate in the ponzi bubble madness pay. Y'know, renting and saving for the time prices make sense again and then make up for the lost time, oh wait that will never happen for them with your scheme. Great.
How about repay or default, what's wrong with that then. Yeah, banksters would lose their jobs and so would others with unproductive non-jobs.
I agree with you a lot Dean, but here I think you're so wrong. You're promoting boom/bust crony economy.
Oh btw, Japan did accomplish inflation, just not in Japan.
Japan goes from reckless optimism to realism
written by Peter T, October 18, 2010 12:25
"It is stupid to spend" on unnecessary things if the ability to pay back the money is in doubt.

"their habits of frugality will have cost the Japanese economy $420 billion in lost consumption" - who has lost the 420 billion dollars? The earth thanks for fewer orders to destroy natural ressources. Last time I looked, Japan was still a formidable technological powerhouse, and if they would focus their efforts on making products better instead of growing the economy by polluting more and using more ressources, it would be a good thing.

All in all, the fate of Japan seems to give us a hint of our own fate, and it doesn't look too bad, except that in the US the poor have bad schools and still no health care coverage.
House prices in Japan have been falling
written by al, October 18, 2010 10:26
"Japan is a very densely populated country. This is why house prices are so high. If its population declined then housing prices would fall."

But, house prices HAVE been falling in Japan for more than a decade. And it's important to state that house prices became high not just because of the high population density, but because of the 90's financial bubble.

This is a far larger effect than $4 on a refrigerator.
Timberland boots sale
written by Timberland boots sale, October 18, 2010 9:55
Timberland boots are very popular amongst everybody, from young to old people. A pair of Timberland shoes brings beauty and comfort to wearer. Most people buy Timberland boots for wet weathers or outdoor activities.?Timberland 2011 shoes are certainly more stylish than its formers. Every pair is excellent style and exquisite crafting which drive the development of Timberland boots sale. A cheap Timberland boots can be found at a larger range of styles. Timberland boots are high quality and comfortable as well as being genrally water resistant.
Where did 21.5 percent growth come from?
written by himaginary, October 19, 2010 9:54
According to IMF data you linked, 1990-2010 growth in the UK is 36.6 percent, whereas growth in the US is 34.3 percent.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.