Will Japan ever escape deflation?

Japan.jpg Although it has not showed in my writings here I have actually pondered for some time whether we were finally witnessing the Japanese economy emerge from the claws of deflation. The signs have certainly been there but trends are also pulling in the wrong direction as also reported by The Financial Times which has an interesting article about how the "Yen slips despite signs of Japanese inflation."

"The core Japanese price index rose by 0.1 per cent in the year to December, the second month in succession inflation has been positive, the first time this has happened since April 1998. (...) However the yen still fell (...)."

Now it all comes back to the question of deflation or no deflation. The central bank of Japan has to be increasingly vigilant about tightening policy especially when politicians claim that the deflationary spiral has not ended ...

"The yen’s lack of traction was partly due to fresh comments from politicians that deflation still existed and the BoJ had to be cautious in tightening policy. Indeed the GDP deflator is still indicating annual deflation of 1.4 per cent, while corporate services price data released on Thursday was also negative."

So are we coming any closer to answer the question of Japan and deflation? Not really, the article cited above does not provide any decisive answer but it perhaps shows that Japan is slowly getting there in terms of allowing and approaching the strutural changes needed to move ahead. Another answer could be that Japan's problems will endure and that the recent turnaround is part of a larger cyclical trend in which Japan hovers between deflation, mild deflation and slight inflation; this view articulated by Yoshitomi Masaru in a paper from 2004 entitled "Japan emerges from the shadow of inflation."

"One special feature of the deflation that has plagued Japan since the 1990s is that it has been moderate and cyclical. (...) As for their cyclical nature, just as there have been three identifiable business cycles over the past 10-plus years, there have also been three similar price cycles."

Another place where we could look for reasons why Japan has been experiencing a long recession is in the realms of demographics. Edward Hugh from AFOE and Bonobo Land has long been advocating the agening and essentially shrinking of the Japanese population as an explanation of the economic recession in Japan. In a guest-post at NewEconomist he makes a compelling argument ...

"There are sound theoretical reasons for expecting that there will be no sustained improvement in internal demand in Japan. Why? Well look at their median age. At 42.64 it's the highest on the planet. And since Japan has virtually no immigrants (as I said above, last year there was a net outward migration as young people move elsewhere in search of better prospects, more negative feedback) this age is set to rise and rise. So, when you come down to it there is no big mystery behind Japan's decade long recession, it has a straightforward explanation: the ageing of the Japanese population."

The argument is really interesting as we try to link the ratio of thrift relative to the demographic transition as described by the Swedish demographics researcher Bo Malmberg. 

"Finally old age arrives, and once more people begin to save appreciable portions of their income, and consumer demand is flat, or even falling slightly."

Deflation is a strong driver of thrift and if an ageing population is as well who knows where Japan is heading?