May 16, 2003

Ooofff!!

David Pilling of the Financial Times on the latest bad news about deflation in Japan:

FT.com Home US: ...Japanese deflation gathered pace in the first quarter with year-on-year prices falling 3.5 per cent - their fastest drop on record.

The fall may fuel fears that Japan, which has managed to co-exist with relatively mild deflation since the mid-1990s, could be sliding into a deflationary spiral.

Japanese prices - as measured by the gross domestic product deflator, considered a more accurate measure than the consumer price index - have been falling more or less continuously since 1995. Annual price falls have averaged between 1 and 2 per cent for most of that time. Friday's figures showed deflation accelerating in fiscal 2002, a year in which Japan was growing out of recession, to minus 2.2 per cent, a record for a full year.

The figures were released along with GDP data showing that growth in the first quarter fell to almost zero, leading some economists to conclude that the economy was on the brink of yet another recession. Nominal growth fell 0.6 per cent in the March quarter, or minus 2.5 per cent on an annualised basis. Paul Sheard, economist at Lehman Brothers, said: "If you look at the chart it looks horrible. It looks as though deflation is going through the floor."

Posted by DeLong at May 16, 2003 12:31 PM | TrackBack

Comments

dumb question -

Why cant the BOJ or Finance Ministry or whomever just print yen? The currency is devalued slightly, driving up prices, deflation over, right? Please tell me what I'm missing, because obviously I'm crazy here.

Posted by: wallster on May 16, 2003 02:16 PM

Because the BOJ is holding up the government to banking reforms...

Posted by: Jean-Philippe Stijns on May 16, 2003 03:03 PM

Wait a second--what am I missing? Where's Brad's attempt to blame this on the Republican party and/or George W. Bush?

Something bad without a Republican responsible? Is it possible?

Posted by: Thomas on May 16, 2003 03:06 PM

Wait a second--what am I missing? Where's Brad's attempt to blame this on the Republican party and/or George W. Bush?

Something bad without a Republican responsible? Is it possible?

Posted by: Thomas on May 16, 2003 03:09 PM

Or the delicate subtlety of Conservative "humor." :)

Posted by: Jean-Philippe Stijns on May 16, 2003 05:29 PM

A simpleminded (don't say dumb!) question; can housing market increases prop up an otherwise deflationary economy, or will the devaluation of the money drag it down? If the latter, doesn't that spell disaster for all of us with 95% ltv home loans?

Posted by: Paul Orwin on May 16, 2003 07:22 PM

"can housing market increases prop up an otherwise deflationary economy"

Not a dumb question at all. Just keep watching the UK and it should get an answer.

"Why can?t the BOJ or Finance Ministry or whomever just print yen? The currency is devalued slightly, driving up prices, deflation over, right?"

Wrong. Among other things the US just won a war in Iraq, and no-one is going to believe that the Japanese authorities have the clout to up-the-anti on a US treasury which is 'comfortable' with a declining dollar.

ie the flaw in all this argument is that the US is letting the dollar fall from a position of relative strength (single global growth engine, victor in war) and not one of weakness. That means it is hard to challenge, and that yen/dollar isn't going towards devaluation any time soon.

On printing money, see the liquidity trap arguments.

Bottom line, there is no available 'monetary solution' to this. Of course monetary policy, in conjunction with something else, is not unimportant.

The important detail is Japanese deflation may be accelerating. This really is a worry. Like I keep saying, one day one more grain will move, and the whole rice pile will 'avalanche'.

Posted by: Edward Hugh on May 18, 2003 03:44 AM

Japan's Sakakibara now says that the fight against deflation was a hopeless cause from the get-go.

Deflation is not a monetary phenomenon after all, he says; monetary policy will not stop it. Instead it is a structural problem...one that America and Europe will have to learn to live with, too.

Printing money in attempt to stop deflation is much like the Fed has said regarding printing more money. This is like painting the fallen leaves green and glueing them back on the tree in order to create "spring" when we are emerging into the winter (7-10 years) at least.

Posted by: Glenn Hautly on June 1, 2003 02:58 PM
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