Friday, August 25, 2006

Revised Data Shows Deflation Remains in Japan

Japanese consumer price inflation have been downwardly revised, pushing down the 12-month increase near zero again, with the number excluding energy prices being below zero.

According to official wisdom, price deflation is the worst disaster that can hit an economy. But in reality, price deflation only have negative effects if it is driven by monetary contraction. Price deflation driven by a higher supply of goods and services will on the contrary help lift real incomes for the people.

This revision could however stop further Japanese rate hikes, something which caused the yen to tumble today. That would be ill-adviced however,as rates are probably too low now to prevent the creation of an unsound credit voom.

Japan is in contrast to most of the world but particularly in America
in the best stage of the business cycle, now that the private sector have done away with their malinvestments and payed off much of its debts. Apart from the excessive budget deficit, Japan's macroeconomic conditions are thus very good. In order for things to stay that way, the Bank of Japan should continue to normalize interest rates.


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