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Wednesday, June 15, 2005

Japan: The Deflation Debate Continues

The fact of the matter is that if you are chasing hares in the wrong places, you are going to miss all the interesting and important stories. Most of the current 'consensus' view of where we are in global economy terms is little short of balderdash, IMHO. We will not see major inflationary problems in the OECD world, the dollar is *not* going to collapse, and, and ....... deflation isn't a dead issue in Japan. Of course with so much time spent contemplating China, Japan and its economic woes are rather pushed down the columns these days. One 'weathered' Japan watcher is the FT's David Pilling, and as he explains today, the debate in Japan, far from being over is just starting to warm up:

Interest rates have not risen from zero since the famous occasion in August 2000 when under the previous, hawkish governor the bank temporarily raised rates a quarter point, in spite of the fact that Japan was still mired in deflation.

n conventional monetary policy terms, the return to zero-interest rate policy has left the BoJ with little to do but twiddle its thumbs until inflation returns.

Yet the apparent calm obscures the fact that these days, the bank is buzzing with debate, and the subject of intense scrutiny from other branches of the government.

The reason is that when the board met last month, it signalled what many consider to be a turning point in its anti-deflationary policy. After flooding the market with ever-increasing amounts of liquidity in an attempt to breathe life into monetary policy, the bank last month tacitly declared an end to the experiment.

I think one part of the present debate is simply a question of people convincing themselves with their own arguments: that is, if deflation is primarily a monetary phenomenon, and you get the monetary conditions right, then deflation must end. Well, unless your name is Ben Bernanke, the monetary conditions are amazingly loose, so logically deflation should be coming to an end. Of course, if deflation in Japan isn't primarily a monetary phenomenon, the argument doesn't hold.

Now deflation is reducing. But we are at - or near - the top of the business cycle. You would expect upward price pressure, before we declare deflation dead it might be more prudent to wait till we're back in a cyclical trough.

1 comment:

ultradale said...

Inflation is widely recognised as a monetary phenomenon. But I don't think deflation is. Japan's real estate crash caused millions of consumers to be left with negative equity on their property and huge loans. Even if new money was free (as it is with zero interest rates)or if you gave everyone a lump sum of money, noone is going to spend it and prices will not rise.