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Home Publications Blogs Beat the Press Japan Has Not Suffered from "Crushing" Deflation

Japan Has Not Suffered from "Crushing" Deflation

Monday, 16 April 2012 05:12

A NYT article that reported on the declining importance of manufacturing to Japan's economy at one point referred to:

"the crushing deflation that has burdened Japan’s domestic economy for nearly two decades."

Actually, Japan has experienced modest inflation rather than deflation for most of the last two decades. Even when prices did fall, the rate of decline has been slow, exceeding 1.0 percent only in 2009, in the wake of the world financial crisis.

Japan, like other countries, suffers from having an inflation rate that is too low. This is a problem because nominal interest rates cannot fall below zero. It would be desirable to have a large negative real interest rate at present (the real interest rate is the interest rate minus the inflation rate), but this is not possible when inflation is a low positive number or a negative number.

The fact that the inflation rate is below zero has no special importance in this story. The decline in the inflation rate from a positive 0.5 percent to a negative 0.5 percent is no worse than a decline in the inflation rate from a positive 1.5 percent to a positive 0.5 percent.

This fact can be seen clearly if we remember that the rate of inflation is an aggregate of tens of thousands of price changes across the economy. When the inflation rate is near zero many of these price changes will be negative, meaning that the prices of some goods are falling. (Computer prices have been falling rapidly in the United States for decades.) When the rate of inflation goes from a small positive number to a small negative number it simply means that the percentage of items with falling prices has risen. It is difficult to see how that could amount to some sort of calamity.

This point is important because the obsession with deflation has been a serious distraction in policy debates. Many have implied that the Fed and other central banks have been successful in their anti-recession policy because they have managed to avoid deflation. This is not true. They have in fact failed because they have not been able to lower the real interest rate as much as would be desirable given the weakness of the economy.

Comments (5)Add Comment
written by Ed Brown, April 16, 2012 7:40
My belief is you have a couple typos which make your post incorrect. That sai, I am still waking up so I might be wrong. I enjoy your blog. Thank you for writing it.
technology & inflation
written by John L, April 16, 2012 7:50
Thank you for pointing out that computer prices have been falling rapidly for decades. Technological process has created a massive, and in my opinion, misleading deflationary factor for decades because demand for computnig is so elastic. People spend what they spend, and get as much computing power as that amount purchases at the time. When a computer is twice as fast at half the cost, the CPI reflects a price drop of 75%. However, the cost of living doesn't drop 75% in the same way as it would if typical (inelastic demand) goods drop 75% in price. If the prices of bread and gas and milk and home heating oil dropped, people would have more money in their pocket because the demand is inelastic - people buy what they need, whatever the cost.
I think this explains why the general public feels that the constant reporting of minimal inflation is total B.S. It's inflation for inelastic demand goods that truly reflects the purchasing power of wages earned in the middle and lower classes.
What About Wages?
written by Timothy, April 17, 2012 5:16
Would it be a calamity if the poverty rate doubled thanks in part to wage deflation? If I were an average worker in Japan, I might say that the last 15 years have been "crushing" when I look at my paycheque.
The delta
written by Floccina, April 17, 2012 1:38
It seems to me that the problem is a to rapid change in the rate of inflation. People took loans with an expectation of inflation that turned out to be wrong.
Money is just a symbol for the wealth found in Nature and which workers produce
written by Mike B), April 18, 2012 9:15
Inflation occurs when the amount of money in the system is more than is needed to circulate the commodities which the working class produces. Money is just a symbol for this wealth. If there are one hundred symbols in the marketplace and one ice-cream cone is priced at one symbol in 2009 and and productivity remains flat for the next two years but symbols in circulation increase to two hundred, the same ice-cream cone should sell for two symbols in 2011.

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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.