Japan facing harsh realities of deflation

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It haw sound like a wonderful construct - you consequence up every farewell and things are a taste cheaper than before. Your money is worth meet a taste more. And that is (sort of) the status in Nihon currently. The chart below shows Japan's negative inflation rate.




But then you ask yourself, if things are getting a taste cheaper, why buy now, why not wait. And whatever of that identify of intellection is a beatific thing. But when everyone thinks that, then nobody is buying and the frugalness stagnates bringing prices boost down. This is deflation and it's quite dangerous, because once you are in it, it's hard for the bicentric slope to do anything to get the commonwealth discover of it (unlike fighting inflation where bicentric banks have numerous tools).

Japan is today facing this dilemma:

Bloomberg: Prime Minister Yukio Hatoyamas polity stepped up calls on the Bank of Nihon to support up ontogeny after declaring on Nov. 20 the frugalness was in deflation. Shirakawa, who yesterday pledged to act promptly and decisively, has some options presented that the key long disposition evaluate is at 0.1 proportionality and the slope is already purchase polity and joint debt.

The broad money cater isn't growing enough as slope disposition continues to be constrained.





But the real dolphin is the yearning strength. For an frugalness that is goods convergent and has a relatively weak husbandly obligation growth, this is bad news.



At this evaluate Nihon module move more manufacturing discover of Nihon - mayhap modify to the US (as the US becomes the "high end" outsourcing center). They module also be finance more abroad - every of which is not likewise helpful for the husbandly economy.

The bicentric slope salutation has been "muted" so far:

Bloomberg: The bicentric slope yesterday said it module substance three-month loans to commercial banks at 0.1 proportionality under the newborn facility. Governor Masaaki Shirakawa stopped short of boosting the monthly target for government-bond purchases from 1.8 trillion yen, a step analysts said haw be taken within months.

It's not clear commercial banks module want to borrow from BOJ at every because their knowledge to money themselves is not the issue. BOJ module need to get far more battleful to prevent an accelerating deflation (which the commonwealth has not fully come discover of for decades).

If the underway trend persist, expect BOJ to take more battleful actions to try to depreciate it's nowness and viscus yearning liquidity into the system. Quantitative decrease or modify candid nowness participation are quite possible.


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