Supposedly, one way around the government debt problems is for governments to “print money”, but this comes at a cost of inflation. However, the Japanese are struggling with both government debt and deflation. So why isn’t this the perfect solution for them?
I don’t know the exact answer, but the problem is that Japanese people don’t spend the money they already have. And amongst other things, they buy bonds with it.
Even though Japan has a very large debt, it’s almost entirely owed domestically, so the issue isn’t at all comparable to the situation in Europe or in the USA. For instance if for some reason it declared bankrupcy tomorrow, it would have a very minimal impact outside Japan.
Because Deflation is a better problem to have than Hyperinflation would be my guess. Japan’s deflation is a very small amount 1 or 2 percent, in practical terms it just means that things cost the same now as they did 5 years ago in absolute yen values, it doesn’t cause a real problem for a business that out of control inflation would.
Japan’s biggest problem is the demographic bomb of an aging population, and the solution to that is obvious, immigration, it’s just not politically acceptable (yet)… sooner or later they have to bite that bullet.
But inflation (or reduced deflation) acts as an incentive to spend more. After all, if your money will be worth less tomorrow, why would you hang on to it?
The reason the don’t have inflation is the BOJ does not want inflation. While many experts agree that some inflation would increase aggregate demand and kickstart some economic growth, that is just a prediction not a certainty. What is certain is that inflation hurts older people and savers by making what they have saved worth less. My guess is that since Japan is an older society with a high savings rate the elites prefer economic stagnation and safe savings to the possibility of economic growth and inflation.
They actually tried this in 2003 and it helped a little. Deflation, in general, is not the problem - it’s a sympton. The real problem is the Japanese save too much, because they don’t really have a lot of confidence in the economy. The keys to long term growth are investment and spending - but the culture (at both the business and personal level) has become very frugal and risk averse. Japan obviosuly has other problems as well, but growth just doesn’t happen when everyone saves all of their money.
Something I read long ago said that Japan (with an aging population!!) also has the highest rate of savings, since their social safety net for old people is very poor. You save as much as you can while you are working.
As pointed out above, printing more money and giving it away (lower taxes, more public works projects, etc.) just means more money goes into savings.
The problem with deflation is not deflation. As other post said, it’s not high, it really means things are stable. What the problem is - prices are not going up. This was the original cause of the US real estate bubble, but we hope it is a feature of most things - you buy a house, you expect to sell it a few decades later for somewhat more than you paid, even if it’s not the 10-times that the bubble promised. You buy stock in US Steel or Nippon Steel, you expect that in 10 years or 20 years, it will be worth a decent amount more. (If you’re like me, your mutual funds in your retirement savings funds have been flat the last 4 years…) When you don’t see any of this sort of price increase for a decade, what do you do to provide for your old age? You buy bonds at 1% interest and try to save like crazy instead. Welcome to Japan.
I know this is statistically true but as a foreigner living in Japan it doesn’t seem true. The shotengais (covered shopping streets) are always packed, people eat out far more than they do in the west, and theres expensive cars and other signs of conspicuous consumption everywhere. The young Japanese people I know don’t save money because they simply can’t, they have multiple part time jobs just to afford basic living expenses.
However to get back to the OP, it would be political suicide for any party to tax the savings of the older generation as inflation would in practice do.
Yeah, I know what you mean - everytime I go to the mall or see people filling up first class on an airline or go to a fancy restaurant, I’m like really, this is what a recession looks like?
That’s an interesting point - all kinds of problems there.
My mind leaps around in funny way sometimes - but - why is growth an imperative? The point made above about price stability doesn’t seem like such a bad thing to me. Oh no - Stability! And if the debt is owed domestically - so what? This all leads me to leap to the conclusion that growth is necessary only to pay back debt in the absence of a growing population. All the talk of austerity needed everywhere else - isn’t this just exactly what the Japanese people are already doing? But it’s not a good thing when they do it? Admittedly, I’ve never taken Econ 101, so I’d appreciate being enlightened. I would assume there are lessons for us in there, no?
Here’s an interesting article from 1996, when rock-bottom interest rates first hit in Japan, and how they hit hard upon elderly savers who had planned to live off interest income.
The theory goes that some level of inflation is necessary.
Let’s say everything is nice and stable and it’s 1980 = 0% inflation. Next thing you know, somebody invents the personal computer and the internet.
Ok, no problem. We’ll just price internet service and personal computers at…what, exactly? Obviously, they’re going to be priced more than the cost of the plastic, silicon, and metal in the computers and cost to employ the workers.
But to maintain overall price stability (i.e. 0% inflation by one definition, if not others) that means something else has to fall in price. So, food? Clothing? TVs? Whatever it is, it affects how much money the affected parties make up and down the supply chain to offset the increased amount the computer manufacturers and ISPs are now making.
One reason a low level of inflation is appropriate is to account for the value of new things added to the overall economy.
Only if interest rates did not keep up with inflation.
Well, the newspaper and the VCR go the way of the buggy whip; just as DVD’s sales are now tanking in face of Netflix, and people are ditching landlines because all they need is a cellphone. People don’t necessarily need inflation, they just spend their money elsewhere and some industries shrink. Others grow. Prorities change.
A lot of the posters seem to be making the general points that
- Japan has other problems beyond deflation
- Too much inflation is also bad, especially for savers.
These don’t seem to be addressing the issue. OK, so don’t go wild and try to eliminate the entire budget deficit at the risk of hyperinflation. But if you did it just a bit, just enough to nudge the small deflation into a small inflation, why wouldn’t it be a win-win? You would stimulate the economy to some extent (by encouraging investment) at the same time as you lessen the debt problem to some extent.
I think this may be a key point.
Japan is, by and large, a success story. It has per capita GDP of $46k, ahead of France and Germany and approaching the U.S. at $48k. It has lowish unemployment; IIRC it has the highest life expectancy of any country in the world. It ranks #12 on the U.N. Human Development Index, ahead of countries like France and Denmark.
To some extent (and I realize this is an over-simplification) Japan’s economy is stagnant because it doesn’t need or want to grow. Some Japanese are happy to enjoy leisure rather than increasing wealth.
You may have hit it exactly. Here is the economic manifesto of the current ruling Democratic Party of Japan: The Democratic Party of Japan
It doesn’t mention “growth” once, instead it’s focused on solving debt problems and trying to ensure full employment.
Anyway Japan doesn’t currently have deflation, inflation was 0.4 percent in April 12 and Economic growth was an annualized 4.1 percent in first quarter of 2012, reforms started in 2010 seem to be working, so there is no need to currently do anything to stimulate inflation.
The general questions answer to this question is Japan does not print more money to combat deflation because their politicians are not in agreement to implement such a measure.
My humble opinion on the matter is Japan has right wing nut jobs just like the US with enough political power to prevent any radical changes to their economy.
They have made a few attempts at printing to combat deflation but didn’t have the political will to go far enough.
Their deflation issues have been largely resolved it just took a very long time to work itself out leaving them with a decade long period of stagnant growth to look back on.
This is true.
Even ramping up the printing presses, all it means is that the economy will be the same size, just the price tags of things will be different.
Stimulus works if the problem is pent-up demand and a lack of confidence. The people would see that they are less likely to lose their job, more likely to get a raise, they start spending. Industry produces and sells more, hires more people, makes more profit, pays more dividends.
If the people are instead in “steady state”, not inclined to risk spending more, the extra money just goes into savings. To much savings chasing too little growth means depressed interest rates and less growth as people are less inclined to take risks and lose their paltry-growing (or slowly shrinking) retirement fund.
Well, I am just describing the underlying rationale.
And it generally fits the real world pretty well. Even if priorities change, they don’t change fast enough to really deal with all the changes in the world. And, to be fair, it still sucks to be the buggy whip manufacturer. Some people consider it a good thing when there aren’t massive shocks to major segments of the economy. That’s the flip side to price stability. Real price stability implies some mild inflation to let the shrinking industries do so gradually, rather than suddenly.
As it is, even if a lot of people think mild deflation isn’t bad, it’s accompanied by massive skepticism on the part of many Japanese on the fundamental health of their economy and a large portion of the current young generation of Japanese who’ve never had and may never have anything resembling a long-term, full-time job, even if they want one, much less retirement savings. Those aren’t exactly good things.
As for the shotengais, that’s a lousy reason for questioning just how bad things actually are in Japan. Frankly, it’s like saying people can’t be that poor if they’ve got a mobile phone.
Fine, so check the economic growth statistics for 2012 I posted in the article above. Things really aren’t that bad in Japan, compared to the current states of the US, UK and Eurozone economies its pretty good really. Japan took longer to deal with structural issues than the west due to cultural inertia but the reforms they have done seem to be having some effect now and Japan is well placed to benefit from strong growth in the entire Asia Pacific region.