Deflation has not returned to Japan

Tyler Cowen has a new post that discusses possible reasons why deflation has returned to Japan.  Unfortunately the post is based on a misconception—deflation has not returned to Japan.  Here are some facts:

Latest Japanese inflation — August 2015:  0.2% year over year inflation

Latest US inflation — August 2015:  0.2% year over year inflation.

So Japan has exactly the same inflation rate as the US, and it’s a positive number.  Has “deflation returned to the US?” Janet Yellen is so worried about inflation that she thinks we need to raise interest rates before the end of the year.

But what about the so-called core inflation rate, excluding food and energy:

Japan:  0.8%

US:  1.8%

This is a more realistic view of the trend rate of inflation in each country, and indeed Japan is lower than the US.  But still no deflation.

Tyler also says the following:

Japan Times reports:

Consumer prices excluding fresh food fell 0.1 percent in August from a year earlier, the first drop since April 2013, the same month Kuroda embarked on a campaign of record asset purchases to rid Japan of its “deflationary mindset.”

My goodness is economics a difficult subject.  (Scott Sumner is implicitly surprised too.)  So why is this happening?

The rest of the post discusses theories as to why this is happening.  But the theories are not very useful, because “this” is not happening.  Japan is not back in deflation, according to any reasonable definition of deflation.  The CPI minus fresh food is a price index used by no other country (AFAIK), and has no obvious justification.  Japan has exactly the same overall inflation as the US, after going several decades with lower inflation that the US.  How they caught up to us is the “this” that needs to be explained, and the answer is simple–Abenomics.

BTW, I was not surprised (implicitly or otherwise) by the Japanese data, which showed inflation unchanged from data reported last month, because I follow Japanese data quite closely.

PS.  It’s obviously possible that deflation will return to Japan — that depends on future monetary policy.  However I predict positive Japanese inflation over the next year.

PPS.  Economics may be a difficult subject, but inflation is not.  It’s always and everywhere a monetary phenomenon.

PPPS.  To show you how misleading headlines can be, consider the following from a recent Financial Times story:

However, core prices excluding food and energy were up 0.8 per cent compared with a year ago in August, a pace seldom seen since the 1990s. That suggests the domestic economy is running out of spare capacity, creating pressure for higher prices.

“Not surprisingly, energy prices continue to weigh on headline and core inflation in Japan, but the Bank of Japan would take comfort from further signs that domestically driven inflation is rising,” said Michael Moen, an investment manager at Aberdeen Asset Management.

“Once you exclude food and energy, inflation is actually rising very gradually as prices for services continue to increase. Against this backdrop it’s unlikely that we will see an increase in the QE programme anytime soon.”

So no need for more QE?  And what is the headline of this excellent FT story?

Japan Falls Back into Deflation for the First Time Since 2013

Just shoot me.


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29 Responses to “Deflation has not returned to Japan”

  1. Gravatar of Why has deflation returned to Japan? Why has deflation returned to Japan?
    26. September 2015 at 07:20

    […] Scott Sumner comments, for any plausible measurement I still say the rate of price inflation is relatively low in a […]

  2. Gravatar of Ray Lopez Ray Lopez
    26. September 2015 at 07:21

    I’ll shoot you, online, in words. My pleasure.

    You’re like Major Freedom. I tell him that Bernanke’s FAVAR 2003 paper shows 3.2% to 13.2% effect on a variety of variables in response to a Fed shock. That is by any measure nearly trivial. But MF counters: “it’s not zero, so statistically significant!”. Technically true, but balderdash. By any reasonable measure, such a tiny range is effectively close to zero. Likewise, inflation of 0.2% is essentially zero, i.e., deflation. It’s ludicrous to quote Friedman on this point, who was concerned with 70s style inflation.

  3. Gravatar of Tyler Cowen Tyler Cowen
    26. September 2015 at 07:27

    For any plausible measurement I still say the rate of price inflation is relatively low in a puzzling manner, relative to asset purchases. Large increases in money are in principle capable of offsetting relative small declines in food and energy prices, and if they do not that is simply another way of restating the puzzle.

  4. Gravatar of Major.Freedom Major.Freedom
    26. September 2015 at 09:11

    If prices fall on the basis of productivity that is not monetary deflation.

  5. Gravatar of ssumner ssumner
    26. September 2015 at 09:44

    Tyler, Yes, all the inflation rates are quite low, but whether it’s “puzzling” depends on which model you use. Given that this inflation rate is about what I expected several years ago, I don’t find it puzzling. The QE figures are misleading, both due to the low level of market interest rates, and also the BOJ’s decision to pay interest on reserves. There are other policy options, such as level targeting, which would probably make it easier to forecast inflation over an extended period of time. Growth rate targeting does lead to some ambiguity.

    Even without level targeting, Japan can generate inflation whenever they wish, if they are willing to depreciate the yen. Inflation is not a difficult technical problem although it may be a difficult political problem (for instance, currency depreciation can be controverisal.)

  6. Gravatar of ssumner ssumner
    26. September 2015 at 09:49

    Here’s a post I did more than 2 years ago. I’d say it holds up very well:

    https://www.themoneyillusion.com/?p=22961

  7. Gravatar of Philippe Philippe
    26. September 2015 at 11:33

    Scott,

    “Economics may be a difficult subject, but inflation is not. It’s always and everywhere a monetary phenomenon.”

    that can’t be true, given that there are three other variables in the equation of exchange and a change in any of them can result in inflation.

  8. Gravatar of Todd Kreider Todd Kreider
    26. September 2015 at 11:47

    Hi Scott,

    I posted this at MR. Can you help me out here? I should have gone here first!

    A while back I posted a comment at econlog to Scott Sumner’s remark about the level of deflation in Japan has actually been at 0% or slightly positive for years while at times slipping to very mild deflation (-0.5%). Sumner replied that he thought the GDP deflater was the better measurement. But now he is using core inflation, which makes sense to me.

    Would it be that he doesn’t have recent GDP deflater numbers so uses core inflation?

  9. Gravatar of ThomasH ThomasH
    26. September 2015 at 12:01

    Looking forward to a comment on the Economist endorsement of NGDP targeting, granted they botched the distinction between level targeting and rate targeting..

  10. Gravatar of Rod Everson Rod Everson
    26. September 2015 at 12:49

    Tyler Cowen: You wrote “…I still say the rate of price inflation is relatively low in a puzzling manner, relative to asset purchases.

    Asset purchases, that is, the QE’s, do not necessarily increase the money supply on a permanent basis. While a billion dollar purchase increases excess reserves in the banking system by that same billion dollars, and also increases customer deposits by a billion dollars initially, if those customers for whatever reason decide to use the money to pay down outstanding loans the money supply ends up back where it started.

    I keep saying that the QE’s have cost the Fed its control over the money supply. This is just another reason why that’s true. Money will go where the economic decision makers take it, but the Fed no longer is one of those decision makers, whereas it used to be the primary one when it came to determining money growth.

  11. Gravatar of Rod Everson Rod Everson
    26. September 2015 at 13:03

    Another point related to money growth: At a zero interest rate, savings deposits start to intermingle with transaction (demand) deposits. This is not a trivial matter when it comes to managing a fractional reserve banking system, especially if reserve requirements differ on the two forms of deposits as they typically do.

    Today, for example, the reserve requirement on deposits at large banks is 10% (on deposits totaling more than about $100 million per bank) while the reserve requirement on savings accounts is zero. But when savings earn no interest, they will tend to linger in demand accounts where they will effectively soak up a share of excess reserves.

    Over the five year period, ending in February of this year, demand deposits increased at nearly a 21% annual rate. Much of that increase was likely due to savings lingering in demand accounts because of the lack of an inducement to move the money to a savings account. So, was it really 20% money growth we witnessed, or just people shifting money from one account to another?

  12. Gravatar of Philippe Philippe
    26. September 2015 at 13:49

    demand deposits also increase as a result of QE, as many of the assets bought by the central bank are sold by non-bank holders.

  13. Gravatar of Philippe Philippe
    26. September 2015 at 13:52

    sorry. I see you mentioned that in your previous comment.

  14. Gravatar of James Alexander James Alexander
    26. September 2015 at 14:06

    Scott, did you write this?
    http://www.economist.com/news/leaders/21666606-it-will-take-more-patience-free-rich-economies-zero-interest-rate-world-after

  15. Gravatar of W. Peden W. Peden
    26. September 2015 at 14:57

    Rod Everson,

    This is one reason why properly weighted monetary aggregates are so important, to assess whether or not a particular shift between types of money matters. As William Barnett puts it, you can’t just add up the apple of $100 in notes with the orange of $100 in a certificate of deposit.

  16. Gravatar of Richard A. Richard A.
    26. September 2015 at 15:06

    As I posted over at Marginal Revolution, it’s nominal GDP in yen that counts.
    https://research.stlouisfed.org/fred2/series/JPNNGDP

    Under Abe, growth in GDPn has been respectable.

  17. Gravatar of benjamin cole benjamin cole
    26. September 2015 at 15:41

    Excellent blogging. The Bank of Japan needs to persist with QE. As Scott Summer suggests, perhaps the Bank of Japan should reduce interest on reserves.

    There remains the intriguing possibility that the Bank of Japan will substantially reduce that nation’s outstanding national debt. The BoJ is monetizing national debt without consequence it appears.

    There is also the oddity that in Japan the average resident has $6,000 in paper cash outside of banks. I assume there is a very large cash economy in Japan off the books. The official statistics we see are dubious.

  18. Gravatar of Ray Lopez Ray Lopez
    26. September 2015 at 17:35

    Sumner, besides not answering Tyler Cowen’s question (other than to assert that Sumner’s model magically solves the riddle), makes this howler: “Even without level targeting, Japan can generate inflation whenever they wish, if they are willing to depreciate the yen”–??? Are you kidding us? Japan’s economy is roughly (last I checked) 15% dependent on imports/exports. A large depreciation of the yen will hardly affect the entire JP economy. Sumner must think JP = Sony.

  19. Gravatar of Rod Everson Rod Everson
    26. September 2015 at 18:14

    W. Peden: You wrote: “This is one reason why properly weighted monetary aggregates are so important, to assess whether or not a particular shift between types of money matters.”

    And what would a proper weighting be exactly, and who gets to decide whether it’s proper or not?

    To effectively manage the money supply in a banking system based upon fractional reserves it’s necessary to make a clear distinction between transaction money and savings. We once did that, but then NOW accounts were authorized and effective management became much more difficult, if not nearly impossible.

    That isn’t to say that the Fed did an effective job before NOW accounts were authorized in, I believe, 1980, but they could have. Now it’s pretty much hopeless unless the Fed decides to take a massive loss on it’s positive carry trade and drain the excess reserve position.

  20. Gravatar of Cliff Cliff
    26. September 2015 at 18:56

    Ray,

    So 15% = 0%. How stupid do you have to be to hold such a belief? You don’t care if the bank is paying 15% or 0% on your deposit because they are the same???

  21. Gravatar of Ray Lopez Ray Lopez
    26. September 2015 at 21:36

    @Cliff–if Sumner’s proposal raise exports by 100%, which is unrealistic, then the economy would get a 15% boost. That’s not that great, as imports would suffer, and you would have a currency war, but aside from that, indeed 15% is not much better than zero. It would divert resources from domestic consumption into exports.

  22. Gravatar of marcus nunes marcus nunes
    27. September 2015 at 06:03

    A Japan Sory: Lessons for central bankers everywhere:
    https://thefaintofheart.wordpress.com/2015/09/27/the-japan-story-a-lesson-for-central-bankers-everywhere/

  23. Gravatar of ssumner ssumner
    27. September 2015 at 06:41

    Philippe, Yes but monetary policy can offset any of the other variables. I do not mean that delta M equals delta P, I mean that by controlling M, you can control P.

    Todd, My recollection is that even the CPI had a negative trend prior to 2013, but far less negative than the deflator, which fell about 1%/year. I think the CPI fell about 0.3% per year from 1998 to 2012. Here I’m citing the CPI because that’s what the BOJ is targeting. I am pretty sure the deflator has risen since late 2012, but I don’t recall the exact number.

    Rod, Yes, permanent monetary injections have a much bigger impact.

    James, No I just bribed them to write it. Seriously, it’s very nice to see respected media outlets moving in this direction.

    Richard, I agree, and did a post on NGDP in Japan a few days ago.

    Ray, You do know that currency depreciation also impacts domestic prices, don’t you?

    Thanks Marcus.

  24. Gravatar of ssumner ssumner
    27. September 2015 at 06:42

    Ray, I forget to mention, if money is neutral then a devaluation has an equal effect on domestic and foreign prices. So which is it?

  25. Gravatar of Major.Freedom Major.Freedom
    27. September 2015 at 09:27

    Ray you wrote:

    “You’re like Major Freedom. I tell him that Bernanke’s FAVAR 2003 paper shows 3.2% to 13.2% effect on a variety of variables in response to a Fed shock. That is by any measure nearly trivial. But MF counters: “it’s not zero, so statistically significant!”. Technically true, but balderdash. By any reasonable measure, such a tiny range is effectively close to zero.”

    You can keep trying to square the circle by using balderdash weasal words like “by any reasonable measure” and “effectively”, but you will forever be wrong.

    You said I said “It’s not zero, so significant.”

    No, the context was money neutrality versus money non-neutrality. In order for money to be neutral, the percent has to be statistically not different from zero percent.

    But you yourself admit that 3.2% to 13.2% is not zero.

    My only argument has been that money is not neutral. In order for that argument to be refuted, you have to show me evidence that the percent is zero percent.

    But you did not do that. You latched onto a paper by Bernanke, and since day one you have been making a mockery of common sense, not to mention a mockery of the bedrock econometric principles, and you have been trying to convince yourself and others that this paper justifies your a priori false contention concerning money neutrality.

    You can’t prove your a priori theory true by reference to a paper that actually disagrees with your a priori theory.

    I’ve also provided you with sources that explain why even the concept of money neutrality itself is a contradiction in terms. The reason money is not neutral at 100% inflation is the same reason it is not neutral at 1% inflation.

    People throughout history have adopted money because they found that they can produce and consume more goods.

    There are so many arguments that show money is not neutral. For example,

    If money were really neutral, then a barter economy should be as productive as a money-based economy

    Do you believe that is the case? That if we start trading goats for two-by-fours, and flour for copper, that we’ll be able to produce the same amount as we could with a common denominator that facilitates economic calculation of gains and losses?

    If money were inherently neutral, then there should be no difference.

    But then if there is no difference, why did millions of people all across the world, in the distant past, who had little to no interactions, why did they all voluntarily choose to use a money to engage in trade? Why did they not keep engaging in barter?

    Why do you engage on money based trading as opposed to barter? By your own actions you are acting in accordance with money non-neutrality.

    If you acted in accordance with money neutrality, then you would be indifferent from saving your earnings in sheep, as you would in cash. But you save in cash, because money solves the problem of double coincidence of wants. Perhaps you’ve heard of that?

    Bernanke’s paper is consistent with money non-neutrality, not money neutrality. I don’t care how many times you keep posting the same drivel over and over, in your pathetic attempt to make yourself believe that the only way you can refute monetarism is by fallaciously describing Bernanke’s paper as proof money is neutral, using those deceitful words like “effectively” and “by any reasonable measure.”

    What you are doing is lying to yourself.

  26. Gravatar of msgkings msgkings
    27. September 2015 at 15:37

    Holy smokes Major.Freedom just destroyed Ray. Nothing left but pervy Greek ashes on some remote Phillipine island.

  27. Gravatar of Ray Lopez Ray Lopez
    28. September 2015 at 20:09

    @ssumner – yes, apparently money neutrality says that domestic prices are impacted as well as foreign, so, I stand corrected, but my conclusion still stands, a large depreciation of the yen will hardly affect the JP economy.

    @MF – “If money were really neutral, then a barter economy should be as productive as a money-based economy” – this does not follow from money neutrality, but this is in fact true. Consider that “bitcoin”, a NON-unit-of-account based ‘currency’, can in theory and in practice satisfy an economy, through point to point transactions akin to barter. Think of it this way: a proctologist wants to transact with a goat herder. The proctologist checks what his services command on the open market, converts this to an arbitrary unit of exchange (that changes daily–it’s not constant like money) then says to the goat herder: ‘you trade me X goats and I give you Y units of my time–in bitcoin’. Herder says “yes”, takes the bitcoin, but does not use proctologist’s services, instead, trading them for something else the herder wants–via bitcoin–which is a form of barter if you think it through. Remember, bitcoin is NOT money, but changes in value. Essentially it’s a form of barter, but instead of exchanging goods or services in real time they are delayed. No unit of account.

  28. Gravatar of Major.Freedom Major.Freedom
    28. September 2015 at 21:48

    Ray, you wrote:

    “MF – “If money were really neutral, then a barter economy should be as productive as a money-based economy” – this does not follow from money neutrality, but this is in fact true.”

    You have just jumped the shark IMO.

    Tell me how I can be just as productive calculating gains and losses of heterogenous goods without a common denominator (money) as I could with a common denominator.

    And do please be as funny as you can, because there is no way you can sound anything but batshit insane, and insanity is no fun without being funny.

    >Consider that “bitcoin”, a NON-unit-of-account based ‘currency’, can in theory and in practice satisfy an economy, through point to point transactions akin to barter.

    Hahahaha

    Ray, you’re disproving yourself. You just said Bitcoins can in theory become a money. THAT IS WHAT “satisfying an economy” means in your sentence there.

    If Bitcoins were to become the universally accepted medium of exchange, then it would be by definition become a money.

    In other words, your “proof” that a barter economy can be as productive as a money economy, consists in posing a hypothetical world of an initially barter commodity (Bitcoins today) that becomes universally accepted as a medium of exchange (Bitcoins in the future) which is Bitcoins becoming money.

    And THAT is your example of how barter can equal a money based economy? By not even posing an example of barter, but a money economy and saying look MF, here is an example of barter!

    Hahahaha, I knew you would be funny.

    >Think of it this way

    You’re killing me! Haven’t I had enough?! Why? Why Ray? Why must you give me a hernia?

    >a proctologist wants to transact with a goat herder. The proctologist checks what his services command on the open market, converts this to an arbitrary unit of exchange (that changes daily-it’s not constant like money) then says to the goat herder

    That is not barter. That is a money based economy.

    As soon as you introduce an indirect commodity, that is, a commodity sought after not for its own sake, but to make a subsequent trade, and this indirect commodity is accepted universally, then you are talking about a money economy.

    Think about what happens today in a person’s life. We live in a money based society. I produce financial services. I want bread. Unfortunately the bread maker has enough financial services and does not want any more from me. So how can I acquire his bread in exchange? Oh! I know! I’ll go out and acquire DOLLARS from my employer, knowing full well that I do not intend to consume that money directly, but use it indirectly to give to the bread maker, who is willing to accept dollars from me. And he too accepts those dollars not to eat, but to later on exchange them himself for goods he wants.

    Money has enabled myself and the breadmaker to make a trade and make ourselves each better off. In other words, we have become “more productive”, since I am able to consume more bread that I would not otherwise have been able to consume as much of, and similarly the breadmaker is able to consume more as well, since I gave him money for his bread where before I could only offer what he didn’t want in exchange for his bread.

    Money solves the “double coincidence of wants problem.” Google that please!

    Money allows people to become more productive, and it allows for greater all around consumption.

    “you trade me X goats and I give you Y units of my time-in bitcoin’. Herder says “yes”, takes the bitcoin, but does not use proctologist’s services, instead, trading them for something else the herder wants-via bitcoin-which is a form of barter if you think it through. Remember, bitcoin is NOT money, but changes in value. Essentially it’s a form of barter, but instead of exchanging goods or services in real time they are delayed. No unit of account.”

    Bitcoins are money on your example.

  29. Gravatar of ssumner ssumner
    29. September 2015 at 13:26

    Ray, You said:

    “yes, apparently money neutrality says that domestic prices are impacted as well as foreign, so, I stand corrected, but my conclusion still stands, a large depreciation of the yen will hardly affect the JP economy.”

    Translation: I’m in way over my head and clearly don’t know what I’m pontificating about, but that’s never stopped me in the past.

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