Would 'Japanification' be so terrible?

Japan's economy has deflated over 20 years, but consumer prices have held steady.

Toru Hanai / Reuters
A foreign exchange dealer reacts at a trading room in Tokyo Oct. 14. The U.S. dollar dropped to its lowest this year against a basket of currencies on Thursday. Is this the first step towards the 'downward spiral' that Japan fell into 20 years ago? Or has Japan's economy struggled as much as economists make out?

The Sunday New York Times ran what it says will be the first in series of articles examining Japan after “two decades of economic stagnation and declining prices.”

The article rightly mentions the property and stock bubbles of the late 1980′s (they leave out the golf course membership bubble) and the popping of those bubbles. But then:

For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.

The idea here is that America could be heading toward the same fate,

as political pressure builds to reduce federal spending and budget deficits, other economists are now warning of “Japanification” — of falling into the same deflationary trap of collapsed demand that occurs when consumers refuse to consume, corporations hold back on investments and banks sit on cash. It becomes a vicious, self-reinforcing cycle: as prices fall further and jobs disappear, consumers tighten their purse strings even more and companies cut back on spending and delay expansion plans.

Have consumer prices in Japan really been in the death spiral that the NYT describes? Well no. The Nikkei 225 stock index peaked at 38,957 on December 29, 1989 (it closed yesterday at 9,539.45). That month Japan’s consumer price index was 91.3417. So, to read the Times, after 20 years of a “corrosive downward spiral of prices” you might expect Japan’s CPI to be not just lower, but a lot lower. In August of this year the index was 99.5.

To achieve this growth in consumer prices, the Bank of Japan (BoJ) increased its monetary base for 25th consecutive month in September to 97.72 trillion yen. In March of 1991, the BoJ’s monetary base was less than 400 billion yen.

Martin Fackler writes that young Japanese cannot afford the same sort of houses their parents could and instead are buying “matchbox-size homes stand on plots of land barely large enough to park a sport utility vehicle, yet have three stories of closet-size bedrooms, suitcase-size closets and a tiny kitchen that properly belongs on a submarine.” Not exactly an indication that prices have plunged.

He chalks it up to young people being uneasy about the future. The “new frugality” of young Japanese men troubles him. They aren’t buying big-ticket items like cars or TVs and they aren’t getting it done in the romance department either. Twenty years of fiscal and monetary stimulus hasn’t stoked Japan’s animal spirits.

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