Japan: I beg you to start beggaring your neighbors

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.



19 Responses to “Japan: I beg you to start beggaring your neighbors”

  1. Gravatar of Doc Merlin Doc Merlin
    28. November 2009 at 00:11

    Is it the Yen rising or the Dollar falling?

  2. Gravatar of woupiestek woupiestek
    28. November 2009 at 00:23

    Since one excludes the other…

  3. Gravatar of marcus nunes marcus nunes
    28. November 2009 at 08:34

    Japan reminds of the Classics IV hit of the late 1960´s (“Faded Photograph”). From 1950 to 1970 growth was 9.7%. From 1971 to 1990 it was 4.2% and since then has averaged a little over 1%. In the next 20 years will it be 0%?
    Curiously, Japan was hit hard by the first oil shock and inflation (CPI) went above 20% in 1974. With that Japan became the first country to target inflation (their target has always meant something close to zero inflation (price stability)). They got that but lost everything else in the process.

  4. Gravatar of johnleemk johnleemk
    28. November 2009 at 10:19

    “Do falling prices really “sound like a good thing?””

    To a lot of ordinary people, unfortunately, yes. Most people who read the news are I think inclined to be skeptical that inflation can be good, and unless they’ve taken some economics classes, inclined to be happy with mild deflation.

  5. Gravatar of ssumner ssumner
    28. November 2009 at 12:46

    Doc, Japan has negative 2% inflation, we have fairly stable prices (depending on the index.) So yes, it is definitely the yen rising not the dollar falling.

    woupiestek, Yes, in exchange rate terms they are two sides of the same coin. But what matters is the yen’s value against goods and services. And the yen is gaining value. A fistful of yen today buys you more stuff in Tokyo than it did in 1994.

    marcus, Good point, but the inflation targeting in 1974-1991 was still mildly positive. Since then it has often been negative. So it is the 1990s where things really got bad. And of course the supply side worsened once their export industries maxed out. Their domestic sector is too inflexible.


    I know, but ordinary people don’t read financial articles about the yen. We are already talking about at most 5% of the population. So I am still perplexed.

  6. Gravatar of Andrew Troemner Andrew Troemner
    28. November 2009 at 15:27

    I agree completely with johnleemk — to the armchair central banker, deflation sounds like just what the doctor ordered. I mean, who wouldn’t like a flat-screen HD-TV for half of the list price?

    ssumner, I’m sure that “ordinary people” read Yahoo News and the Associated Press. This isn’t exactly the Financial Times he’s quoting.

  7. Gravatar of Bob Murphy Bob Murphy
    28. November 2009 at 15:40

    hohnleemk wrote:

    Most people who read the news are I think inclined to be skeptical that inflation can be good, and unless they’ve taken some economics classes, inclined to be happy with mild deflation.

    I have a PhD in economics and I would be happy with mild (price) deflation. There was mild price deflation in the US in the latter half of the 1920s, which are not known for being hard times economically. Of course you and Scott can come up with caveats such as, “But with sticky prices and Pelosi in charge of Congress…” but you can say that just about anything; normally Scott doesn’t like it when economists justify their policies as nth-best.

    Other things equal, when the central bank creates new money it is transferring wealth from everyone else into the hands of the people getting the new money. I also am happy if counterfeiters have their printers break.

  8. Gravatar of ssumner ssumner
    28. November 2009 at 16:00

    Andrew, I suppose you are right, but I still have trouble picturing an average American reading a news article on deflation in Japan. But I suppose they know their readers better than I do.

    Bob, I am glad to hear you discuss the deflation of the late 1920s. I was getting tired of all the Austrian commneters coming on her and telling me the stock market crash and Depression were caused by the Fed’s inflationary policies during the late 1920s. You are right, mild deflation can be OK if it is anticipated. But it is not a wise policy to adopt in a middle of a financial crisis where trillions of dollars in debt had been negotiated on the understanding that inflation would be positive. Better to phase in the policy during a period when the banking system isn’t already flat on its back from other problems like subprime loans. 1999 would have been a better time to start gradually moving toward deflation. Or 2004. But not late 2008, right in the midst of a financial crisis.

  9. Gravatar of Bob Murphy Bob Murphy
    28. November 2009 at 18:17

    You are right, mild deflation can be OK if it is anticipated.

    Those Japanese are slow learners, eh?

  10. Gravatar of Bob Murphy Bob Murphy
    28. November 2009 at 18:18

    BTW I should make clear that I am just waiting for large price inflation in 2010, at which point Scott will have to humbly apologize for his errant ways. Until then I am not bothering to do anything constructive since Scott’s views are so well-formulated that it would take far too long to actually debate him.

    Hence I snipe.

  11. Gravatar of Bob Murphy Bob Murphy
    28. November 2009 at 18:21

    Another clarification: When I was responding to johnleemk, I mentioned that I had a PhD. My point wasn’t, “I must be right, cuz I have three letters after my name.” I was just saying that to be funny since his post implied that anybody who has taken one economics class realizes silliness of the layman’s view that mild price deflation can be a good thing.

  12. Gravatar of johnleemk johnleemk
    29. November 2009 at 10:31


    I didn’t read it that way at all — I’m well aware that mild price deflation can be good, and that there’s good economic reasoning for this. I was saying that to a layman, mild deflation regardless of the cause or the circumstance often looks good. A 2.2% fall in the Japanese CPI is “mild deflation,” after all.

  13. Gravatar of Scott Sumner Scott Sumner
    29. November 2009 at 14:04

    Bob, I often say that Japan’s big problem is structural, not lack of AD. But after being stable for 6 years (2002-08) the CPI is again falling at a two percent rate. Not a wise policy in the midst of deep worldwide recession.

    Regarding 2002-08, I do not agree with those who argue Japan’s problems were due to excessively low inflation.

    Bob#2, You won’t have to wait until 2010; you and I have a gentlemen’s bet on whether inflation will soar in the last half of 2009. It won’t be long before that bet is resolved.

    Bob, one other thing. I know where you’re coming from, but I stand by my comment on the silliness of having to explain the problem with deflation. If readers had your view, that increases in AD are a bad idea, then I would have expressed my thought differently. But what Yahoo was really saying was the following:

    “Readers; you may not realize this but all those governmental attempts to boost demand for goods and services in a recession are essentially policies aimed at boosting inflation.”

    I find many people don’t understand this. Incomes in Japan are no higher than in 1993. Most Americans don’t understand the connection between the rate of inflation and the rate of increase in their nominal incomes. Apparently even many readers of articles on the Japanese yen don’t understand this. Whether deflation really is a good or bad thing is an entirely different question.

  14. Gravatar of jean jean
    29. November 2009 at 14:43

    In addition to change in inflation expectations I see another bad thing caused by deflation:
    the lower the inflation target (or NGDP target), the bigger the balance sheet of the central bank (30% of the GDP in Japan). I assume that this does not urge banks to do their asset management properly.

  15. Gravatar of Doc Merlin Doc Merlin
    29. November 2009 at 18:14

    “Incomes in Japan are no higher than in 1993. Most Americans don’t understand the connection between the rate of inflation and the rate of increase in their nominal incomes. ”

    Japan has a massive underground cash economy, in large part spurred on by having the highest corporate income taxes in the world. I wonder if this might have something to do with it.

  16. Gravatar of Scott Sumner Scott Sumner
    1. December 2009 at 06:38

    Doc Merlin, I did my dissertation on currency hoarding and the underground economy. The ratio of the tax rate to the interest rate is the number of years you can hoard income in cash before you would have been better off paying taxes. In the US that ratio correlates with the cash/GDP ratio over time. That ratio is high in Japan for two reasons; high taxes and low interest. So hoarding cash to evade taxes is profitable. Ironically, the liquidity trap may make their underground economy bigger.

  17. Gravatar of Doc Merlin Doc Merlin
    1. December 2009 at 22:34

    Thanks, Scott that last comment just crossed wires with the part of my brain that was thinking about De Soto’s book. I am inspired.

  18. Gravatar of D. Watson D. Watson
    2. December 2009 at 12:14

    I think the place it comes from is that we talk about the dangers of inflation so much, particularly in that one economics class people may have had. The Fed is supposed to be tough on inflation. The elderly complain about their savings being eroded by inflation and give people a mentality that price increases are an evil. Libertarians point out that inflation is a tax on savings. Ron Paul makes a splash attacking the Fed for its rampant inflationary policy of the last two decades. Inflation is a bad guy just about everywhere. Inflation is always described as increases in the prices of things people buy, forgetting the price of the things they sell (wages). So they say, negative inflation’s gotta wear the white hat, right? It takes a bit to figure out that negative inflation is more often the bigger, uglier bully.

  19. Gravatar of Scott Sumner Scott Sumner
    3. December 2009 at 05:55

    D. Watson. Yes, I suppose you are right. BTW, people like Bernanke have argued that deflation is even worse than inflation. And then he went on to prove this assertion.

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