Friday, December 28, 2007

Wasn't Rising Prices Supposed to be Good For Japan?

For a long time, we've been hearing how Japan supposedly "suffers" from deflation. As you may remember, less than 3 months ago, some Financial Times journalists declared it bo very bad that the Japanese would get cheaper mobile phone calls and declared that it would "push Japan into deflation". I pointed out that this was not a problem because first of all deflation caused by increased supply is a good thing and secondly, deflation would soon be ended in Japan because of rising oil prices.

I was right, of course. Consumer prices in Japan was up 0.6% in the year to November. While that is a lot less than the 4.3% in U.S. and the 3.1% in the Euro area, that represents a significant increase and it alsos represents an end to deflation. So, according to the ignorant Financial Times journalists, this must have represented a boost to the Japanese economy. But as a matter of fact, it didn't as it meant a reduction in purchasing power and therefore consumer spending (The Japanese consumers aren't as keen as American consumers to increase spending even when their income falls.).


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