Friday, April 25, 2008

End Of Deflation Hurts Japan

Japan saw consumer price inflation rise in March to its highest level in more than a decade. At 1.2% it is still very low compared to the rest of the world, but it nevertheless a big increase from the previous negative numbers.

While non-Austrian economists have generally described the previous price deflation, as a problem, many now realize that rising prices may not be so good. Economic and Fiscal Policy Minister noted that "isn't at all a good thing because it's being driven by higher energy prices rather than demand". Or in other words, it is supply-driven.

The flip side of this is that just as higher prices caused by supply factors are bad for the economy, so are lower prices caused by supply factors good for the economy. Or in other words, price deflation is not a bad thing as long as it is not caused by monetary deflation.

4 Comments:

Anonymous Justin Rietz said...

Slightly off topic, but what are your thoughts on inflation in China? As you know, Jim Rogers recommends dumping any dollars investors have and moving to Asian currencies, particularly the RMB. However, China's money supply is growing by leaps and bounds (double digits) - much faster than the U.S. money supply. The same is true for Singapore. Moreover, both countries are torn between fighting inflation and keeping their currency cheap vs. the dollar.

Based on this, I hesitate to move to either of these currencies. Is there something I am missing?

5:19 PM  
Blogger stefankarlsson said...

What you're missing is that first of all, real economic growth is far higher there, meaning that money supply increases relative to the supply of goods and services is lower.

And secondly, they don't inflate so much on the domestic front, but rather to -for mercantilist reasons- hold down temporarily the value of their currencies. A sort of price control to prevent the price of something that is in a shortage from rising in price. But ultimately, that won't prove sustainable and when they ease that, there will be significant increases in their exchange rates.

10:10 PM  
Blogger Flavian said...

All other things being equal, price deflation is ALWAYS good.

1:29 PM  
Blogger stefankarlsson said...

Flavian, that is only true if you disconnect cause from effect. But in the real world, falling prices caused by a falling money supply is part of the same phenonema.

6:45 PM  

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