Remember the deflation that has crippled the Japanese economy? Didn’t happen:
There’s a lot of unfounded talk going around these days about how deflation has killed the Japanese economy, as good friend Don Luskin pointed out to me the other day. This chart shows the year over year growth in Japan’s Nationwide CPI. Since Mar. 1993, Japan’s price level hasn’t budged: inflation has netted out to zero. That’s over 17 years of price stability. From the very peak in Japan’s inflation, which was in late 1998, Japan has “suffered” an average annual decline (i.e., deflation) in its price level of 0.4%. It’s hard to see how this might be the killer deflation scourge that it’s made out to be.
And as for “killer,” it turns out that Japan’s economy hasn’t been killed at all. From the end of 1998 through the first quarter of this year—the period during which the Japanese price level fell 0.4% per year on average—Japan’s economy expanded by almost 10%, for an average annualized growth rate of 0.8% per year. By comparison, the U.S. economy grew 25%, or 2.0% per year on average over the same period. The U.S. economy sure trumps the Japanese economy, but not if you consider that our population is younger and has grown at a faster rate than Japan’s.
Hat tip: Clusterstock
This ties in very nicely with the point I’ve been making about the influence of demographic trends on the economy here. The difference between here and Japan is that our population is actually growing and, like China’s, our economy needs to grow faster than Japan’s to keep up with the changing population.
So, if Japan didn’t experience deflation and we aren’t experiencing deflation what is Dr. Krugman so worried about? I can only speculate. Inflation would make real government spending increases a lot easier to hide.
