Japan facing harsh realities of deflation

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




But then you ask yourself, if things are getting a taste cheaper, ground acquire now, ground not wait. And some of that identify of thinking is a beatific thing. But when everyone thinks that, then nobody is buying and the frugalness stagnates transfer prices further down. This is deflation and it's quite dangerous, because once you are in it, it's hornlike 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 now facing this dilemma:

Bloomberg: Prime Minister Yukio Hatoyamas polity stepped up calls on the Bank of Japan to prop up ontogeny after declaring on Nov. 20 the frugalness was in deflation. Shirakawa, who yesterday pledged to behave promptly and decisively, has some options given that the key overnight lending evaluate is at 0.1 proportionality and the slope is already purchasing polity and corporate debt.

The broad money cater isn't growing sufficiency as slope lending continues to be constrained.





But the actual dolphin is the yen strength. For an frugalness that is export focused and has a relatively anaemic domestic demand growth, this is intense news.



At this evaluate Japan module move more manufacturing discover of Japan - possibly even to the US (as the US becomes the "high end" outsourcing center). They module also be investing more foreign - every of which is not likewise adjuvant for the domestic economy.

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

Bloomberg: The bicentric slope yesterday said it module substance three-month loans to advertizement banks at 0.1 proportionality low the new facility. Governor Masaaki Shirakawa stopped brief of boosting the monthly target for government-bond purchases from 1.8 1E+12 yen, a step analysts said haw be condemned within months.

It's not clear advertizement banks module poverty to verify from BOJ at every because their ability to fund themselves is not the issue. BOJ module need to get far more aggressive to prevent an accelerating deflation (which the commonwealth has not full come discover of for decades).

If the underway trend persist, wait BOJ to verify more aggressive actions to try to depreciate it's nowness and pump yen liquidity into the system. Quantitative easing or even direct nowness intervention are quite possible.


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