After 6 years of relatively stable consumer prices, the BOJ has returned to its deflationary policies:
TOKYO (AP) — Japan got word Friday that prices fell again in October, just as a surging yen threatens to worsen the deflation that is undermining the country’s fragile economy.
AP – Jobless people sleep with their belonging at a park in Tokyo, Japan, Friday, Nov. 27, 2009. The number …
The core consumer price index, which excludes volatile fresh food, retreated at a near-record pace of 2.2 percent from a year earlier, the government said. Prices have now fallen for eight straight months — a trend that the government highlighted last week for the first time in three years.
The news came amid heightened concern over the Japanese currency, which hit a new 14-year high against the dollar in early Asian trading. The greenback touched 84.41 yen before recovering to low-86 yen levels.
A strong yen and deflation represent a perilous combination for the world’s second-biggest economy.
Falling prices, which plagued Japan during its “Lost Decade” in the 1990s, may sound like a good thing. But deflation can hamper economic growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.
Meanwhile, a strong yen erodes the overseas profits of Japan’s big exporters like Sony Corp. and Toyota Motor Corp. It can also aggravate deflation. Prices of imports and raw materials decline, which then pushes domestic consumer prices lower.
“In the midst of deflation, such a sharp rise in the yen is a very serious problem and could drag down the economy,” said Fujio Mitarai, head of the Nippon Keidanren, the country’s biggest business group. “I certainly hope the government responds with emergency steps.”
Concerns overnight about debt problems afflicting Dubai have driven investors to the yen as a safe haven. Dubai World, a government investment fund with debts totaling around $60 billion, has asked creditors if it can postpone payments until May.
The yen also strengthened because of the disappointing comments Thursday by Japanese Finance Minister Hirohisa Fujii, analysts said. He sharpened his tone Friday, calling the yen’s recent rise “one-sided” and saying the government would take appropriate measures if needed.
“What the market wants is for him to go a step further and say he is actually going to do something,” said Akane Vallery Uchida, foreign exchange strategist at The Royal Bank of Scotland in Tokyo. “Unless he becomes more specific about taking action, it’s not convincing enough.”
Japan hasn’t intervened in the currency market since March 2004. But it looks to be edging closer to some sort of action with prices expected to continue falling. The core consumer price index for Tokyo, seen as a barometer for prices nationwide, declined 1.9 percent.
There are so many frustrating things in this article that one hardly knows where to begin. Is it really true that in the year 2009 one has to explain to readers of financial news that deflation can be a really harmful process? Do falling prices really “sound like a good thing?”
And how about the government statement that appropriate action would be taken “if needed?” The yen rises from 110 to 85 to the dollar, deflation accelerates, and the homeless are sleeping in Tokyo parks. What sort of evidence would indicate a weaker yen “is needed?”
Or are you more depressed by the many American economists who would say there is nothing the Japanese can do to halt the deflation? After all, they’re in a liquidity trap, aren’t they?
And please don’t send me any comments about how bad it would be for the world economy if the Japanese stopped their highly deflationary strong yen policies. For the millionth time; ECONOMICS ISN’T A ZERO SUM GAME.
BTW, Japan should be booming; they are perfectly positioned to benefit from China’s voracious appetite for sophisticated capital goods.