Japan Learns to Live With Deflation; What Have Economists Learned?
Last week, I asked the question What have we learned from Japan?
The entire article is well worth the read, but I really like his quote from a Bank of Japan study on their enormous multi-decade QE ‘experiment’ (failure):
As a study by the Bank of Japan of its own huge experiment with QE concluded, “While we can enumerate several routes of the monetary base channel which suggest that expansion of the monetary base can have some expansionary effect on the economy, our analyses suggest that the quantitative magnitude of any such effect is highly uncertain and very small.” [The Effect of the Increase in the Monetary Base on Japan's Economy at Zero Interest Rates - An Emprical Analysis, Bank of Japan, 2002].
[Emphasis Mine]
So what have we learned in the U.S. from Japan’s 2 lost decades (with potentially more still coming)? Apparently Nothing.
Business Week is proving, once again, that economists have learned nothing from Japan in Japan Learns to Live With Deflation:
Ben Bernanke has been lecturing on deflation's perils since he joined the Federal Reserve in 2002 and has often held up Japan as Exhibit A. When the Fed launched QE2, the quantitative easing program to promote credit expansion in the U.S., in November, the central bank chief hoped to avoid the scourge that has devastated Japan's economy. U.S. consumer prices, excluding food and fuel, climbed at their slowest pace since records began in 1959, the Commerce Dept. reported on Dec. 22.
Hmm, so Bernanke has been flaunting Japan as the poster boy for deflation's perils......let's read on:
There's something curious about the way the deflation syndrome has played out in Japan, though. The Japanese don't feel that threatened anymore. "Everyone knew deflation was bad for jobs and bad for the economy, but gradually households and companies just got used to it," says Martin Schulz, a senior economist at Tokyo's Fujitsu Research Institute.
Deflation—the steady drop in prices of goods, wages, and services—has many ill effects. Households are stuck paying off mortgages, car loans, and other debt even as their take-home pay has declined. Also, as housing values fall, consumers have smaller nest eggs for retirement. Companies, meanwhile, are unable to raise prices, which puts pressure on profits.
There are so many flaws with this paragraph. Households are only stuck paying off mortgages if they took out more debt than they can handle. The same is true with car loans and "other debt." Ironically, inflation is what encourages (and in many cases forces) people to take on more debt than they can handle. Debt is less friendly during deflation, so individuals are less likely to take on debt to begin with. These problems only really arise when you shift away from an inflationary environment into a deflationary one. During inflation, people are encouraged to leverage and take on debt. When teh bubble bursts, deflation will take hold. For Japan that bubble burst in the 90s, and those holding mortgages were likely in trouble. Once that bad debt was purged, deflation was no longer a problem. In fact, as we'll see, it may have been part of the solution. Let's read on...
Yet the Japanese have discovered the benefits of deflation as well. Monthly pay dropped to an average 315,294 yen ($3,800) in 2009, the lowest level since the government began tracking wage data in 1990. "It's not like I'm promised any pay raises," says Momoko Noguchi. The 24-year-old Tokyo resident gets by on two part-time jobs by shopping for everything from nail polish to dinner plates at her local 100-yen outlet (the Japanese equivalent of an American dollar store), and she pays 400 yen or less for lunch. "I hope prices keep falling." Four out of five Japanese say higher costs would be "unfavorable," according to a central bank survey.
Faced with consumers such as Noguchi, companies in Japan have actually accelerated deflation. Retailers "have poured a lot of energy into offering products that are cheap but still have high value," says Naozumi Nishimura, an analyst at TIW in Tokyo. "We're seeing some good effects from that."
....
Price cutting by companies has helped Japanese consumers adjust to deflation. The average household owns 1.4 cars and 2.4 color TVs, about a quarter more than in 1990, a Cabinet Office survey shows. Deflation has helped home buyers, too, by forcing prices down from their peaks in 1990: According to calculations based on yearly Land Ministry data, Japan's residential land prices have dropped by an average of 2.9 percent a year over the past two decades.
Golfers pay 26,800 yen ($324) to play on the weekend with a caddy at the Bobby Jones Jr.-designed Oak Hills Country Club, 90 minutes' drive from central Tokyo. Twenty years ago the fee was about 40,000 yen, says Katsutoshi Ohira, acting manager. All told, the proportion of people content with their standard of living was 63.9 percent last year, compared with 63.1 percent in 1989, a government report said.
Deflation is so entrenched in Japan that companies are exporting it. Fast Retailing plans to open 44 Uniqlo stores overseas this fiscal year. Supermarket chain Aeon has earmarked about $2.5 billion over three years to open stores in China and Southeast Asia. Daiso Industries, which dominates the 100-yen retail sector, now has outlets in more than 20 countries.
Amazing, right? Wages are lower in Japan today than they were in 1990, and yet its ok because prices have declined as well. In fact, companies are embracing deflation and still managing to profit nicely off of it. The Japanese are seeing "good effects." It doesn't sound like Uniqlo is doing so bad in the deflationary environment...
In Japan, where 23 percent of the population is over 65, a sudden rebound in prices would hurt pensioners and retirees especially hard. "It's amazing what you can buy with 100 yen now. We didn't have 100-yen stores before," says Sachiko Enokida, 80, who lives on her bimonthly pension checks from the government. "I would hate for things to get expensive again."
Unfortunately, things are very likely going to get expensive again in Japan. It's not because of the wrath of deflation, but because of the government's response to deflation over the past 20 years.
Thanks to Keynesian economic clowns screaming for tough action to fight deflation, Japan has built bridges to nowhere, and run record deficits for over 2 decades trying to ward off deflation. Even amongst their efforts, we see that wages, golf prices, grocery prices, and retail prices are lower than they were 20 years ago....and the people like it that way!
The repercussions of these actions have to come home to roost eventually. The debt and deficits that have been run up over the past 20 years can't be paid back, and when governments cant pay back their debts they default. When interest rates begin to rise in Japan it will be devastating. It's not going to be a pretty picture for Japan when that happens.
The irony of Japan's extreme efforts to fight deflation is that deflation is actually the natural course of successful economies.
Deflation is the natural course of successful economies
Not enough people understand this, so I'll say it again: deflation is the natural course of successful economies. You see, in a successful economy, productivity increases, and technology advances. Both of these things lower prices. The technology sector is a great example of this. We often hear how lower prices mean companies can't hire as many people and can't expand, but look at the many technology companies such as Dell, Apple, HP, IBM. The prices of their technical gadgets and services have declined like rocks for decades even in the midst of inflation. Why? Because of technological advancements, and massive increases in productivity. Yet at the same time these companies have grown by leaps and bounds, hiring well-paid employees every step of the way and contributing greatly to economic growth. I can't stress it enough: deflation is the natural course of successful economies. Deflation should be the norm, not inflation.
Inflation is the course for a theft-based and corrupt economy where governments inflate currency for their benefit and for the benefit of those who they give the money to first at the expense of everyone else. It causes higher prices, which hurts people who get access to money last (the poor at the bottom of the totem pole).
The Bottom Line
Returning to our article:
The bottom line: Although deflation ultimately poses a serious threat to Japan, ordinary consumers are benefiting from lower prices.
So we see that we have come full circle only to again show that economists are incapable of looking at the facts and learning new things. What will it take to get us to realise that we are following a similar course as Japan? Japan's central bank explicitly tells us that the effects of quantitative easing are "highly uncertain and very small," and we now see that deflation has not been as horrible for Japan as we have been lead to believe. The true bottom line is that we find ourselves embarking on the same misguided policies with economists cheering the Fed and the Government on every step of the way, slowly but surely marching our country toward the path of financial ruin.