Japan's new inflationary strategy: wrong target

The cause of Japan's deflation isn't monetary, it's demographic. Inflationary policy won't work in the long term.

|
Kim Kyung-Hoon/Reuters/File
People exercise with wooden dumbbells during a health promotion event to mark Japan's "Respect for the Aged Day" at a temple in Tokyo in September. The population of Japan is expected to fall by 30 percent to less than 90 million by 2060, with 2 in 5 people being 65 or older, a government agency survey showed in January.

Japan has during the latest decade lagged most countries in GDP growth and it has also had low but relatively persistent price deflation. This has by some been interpreted as evidence that even low levels of deflation is harmful to the economy.

However, if you adjust for population growth, Japanese growth has actually been in line with U.S. growth and somewhat higher than the average for Western Europe. And if you further adjust for the fact that Japan's population is aging much faster than elsewhere, growth has actually been higher. Total GDP may have grown slower, but GDP relative to its working age population has been growing somewhat faster than the average for rich countries.

As a result, unlike both the U.S. and Western Europe it has a higher employment to population (in the 15 to 64 year age span) than a decade ago, and a lower unemployment rate. This clearly indicates that the source of Japan's economic stagnation is demographic, not monetary.

This didn't stop Japanese voters from electing a new government that promised to create at least 2% in yearly inflation and has threatened to remove the Bank of Japan's formal independence unless it does a lot more to inflate. Since an "independence" that depends on it following orders isn't really independence, this means that the Bank of Japan's independence has in effect already been abolished.

One interesting aspect of this is that it shows that merely by creating expectations of more inflation, you can create it. During the latest month the yen has fallen by 4% against the U.S. dollar, by 5% against British pound and the South Korean won (I've included the won because South Korea is Japan's most important competitor in its export markets) and by more than 6% against the euro.

Compared to a year earlier, the declines are even more dramatic, falling by nearly 10% against the dollar, by more than 10% against the pound and the euro and by more than 15% against the won.

By raising import prices and raising nominal export revenues this will raise price inflation and nominal GDP.  However, real GDP won't be increased other than at best temporarily, because prices are likely to increase about the same as nominal GDP.

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Japan's new inflationary strategy: wrong target
Read this article in
https://www.csmonitor.com/Business/Stefan-Karlsson/2012/1227/Japan-s-new-inflationary-strategy-wrong-target
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe