Why no inflation in Japan?

Economics Economics Questions
1

Japan has stagnated for many years even though the interest rate is near zero. My question is, from the Austrian viewpoint, shouldn’t there be high inflation in Japan?

I’ve lived here for 8 years, and consumer prices have been completely steady. Although the interest rate is near zero, if you actually want a personal loan they charge you 18-26% or so. Where’s the inflation?

Whatever the answer, the lack of Austrian study on Japan seems a glaring weakness, because Japan is inevitably cited in debates I have with people on reddit.com and such. I think we need a good response to this, beyond what Murphy wrote in his response to Krugman’s critique of AE.

2

Perhaps prices would be lower if it wasn’t for inflation keeping prices steady.

3

If I recall correctly, is it not true that an apple is 2 dollars in Japan?

4

That is true, but the price hasn’t changed in the 8 years I’ve been here.

5

I don’t know about you, but all it took was a quick look at the Bank of Japan’s monetary data…to see that the ‘boom’ in the 80s was a big bad bubble. Since then it doesn’t look like they’ve inflated anymore than other nations (“stable prices”):

Average Amounts Outstanding of Money Stock
M2/Percent changes from the previous year in average amounts outstanding/Money Stock (Formerseries for data through March 2004)
% MA’MAMS0ANM2

Average Amounts Outstanding of Money Stock
_Quasi-money/Percent changes from the previous year in average amounts outstanding/Money Stock (Formerseries for data through March 2004)
% MA’MAMS0ANQ

6

Thanks for the charts. I see that Japan’s money stock has been stable, so I’m wondering why this is despite the zero-interest rates?

7

Probably becuase people weren’t/aren’t borrowing? Banks can’t inflate if no one wants to invest in anything.

8

I remember recently reading an article on mises.org which listed money base expansion for the major world central banks starting in 2000 but sadly I cannot find it anymore in the archives. Can anyone help?

If I remember correctly Bank of Japan during the past decade has increased its money supply considerably less than the ECB and the US federal reserve but, again, I would need to have that article available.

On the issue of apples: Japan is one the most generous countries in the world when it comes to agriculture. Like Switzerland they spend roughly 9% of their GDP in agricultural subsidies and, on top of that, they have a very punitive system of tariffs when it comes to importing foodstuff, rice being subject to extremely heavy duties. Perhaps they have no inflation as we know it but they surely have price fixing.

9

Another factor could be that Japan’s population is ebbing. People buy less as they age; Japan is having less children.

The idea that economies must continually “grow” (and by what metric?) strikes me as wrong.

10

A low interest rate does not mean that high inflation must ensue. Japan has an incredibly high savings rate - somewhere near 25%. A very high savings rate means that interest rates are naturally lower. This, in turn, means that a low interest rate set by the central bank does not have much effect on the economy. The interest rates that you see when you borrow money are effected by other factors as well, like the demand for credit, the cost of credit (the money that banks earn), and how much money savers choose to put into banks.

If you want to learn more about the Austrian take on Japan and deflation, I suggest you google “Japan + deflation site:mises.org” or perhaps “Japan + deflation site:fee.org.” If you learn how to use google for your own needs, you can find practically anything.

11

A friend of mine recently visited Japan. There was a strong shift in attitudes about consumer credit after the 80’s. There is no longer much of a consumer credit market at all. Credit cards are rare. Even ATM’s are relatively rare, compared to here.

I have heard that banking is now over-regulated. Whether their regulations are designed to prevent risky loans or to force loans to politically popular areas, like housing for low-income earners, it means there are less people willing to enter or remain in the banking business. Profit opportunities are prevented, and risky activity is likely encouraged. And given that the Japanese witnessed the government prop up the worst of their banks, they don’t respect them or trust them.

Also, the Japanese have never been given a good explanation about what happened to their economy. I doubt the Austrian Business Cycle Theory ever got mentioned in their nightly news. The government’s official line is likely similar to our own - greedy jerks wrecked the economy with their greedy wrecking balls of leverage. I assume they told them they needed to spend their way out of the recession, and everyone grinned awkwardly. I do not actually know what the headlines said, but given the policy response WHICH CONTINUES TO THIS DAY, it seems apparent the normal Keynesian BS was barked through every loudspeaker in the nation.

All these things point to three common truths.

  1. Cash is the primary medium of exchange for commonplace consumer purchases.
  2. Mistrust in the economy as a whole pushes most Japanese to save heavily.
  3. Incredibly low interest rates and mistrust of banks discourages saving in banks.

So, people are saving cash. Even as the Bank of Japan pumps out more cash, it is taken out of circulation by individual savers. Thus, it has little opportunity to influence prices. Banks cannot create money via loaning, because they cannot secure “deposits”.

Ironically, Japan is the best case we have to show how artificially low interest rates can produce stagnation rather than an artificial boom.

I am curious to know exactly how much cash the BoJ has created. If large chunks are hiding under matresses, a quick bout of price inflation could trigger hyperinflation, if interest rates don’t rise to push this money into the credit market.

Of course, I think America has the largest chance of hyperinflation, with a lot of our base money sitting overseas.

12

JapanMoney.jpg
JapanMoney.jpg760×668 108 KB

Here’s a graph I made from the BoJ data. I’m not exactly sure how they define everything (What the hell is “L”?!?!?!). Cash and M1 growth no longer influence M2 like they used to. Talk about pushing on a string. Notice how the strong gains in M1 and cash are slightly offset by decreases in “quasi-money” which I assume are money market accounts/mutual funds. So it would seem that money is being created, and it is being saved; however, it is not being loaned, neither to banks nor from banks.

13

Wow, thanks all! That was quite useful. I just got back from a high-class supermarket in downtown Osaka, and guess what? They don’t take credit cards. However, they do let you pay by celphone, by touching it to a censor - a direct cash transfer. Quite a few Japanese people own gold as well. And many people carry enough cash on them to buy a decent used car ($3000 or so).

Strange thing is that libertarianism and Austrian economics are completely unknown in Japan, and there is only one politician in the Diet who leans libertarian. On the other hand, last year there were groups of (Japanese) people set up with informational charts and such out in front of major banks explaining about the Creature from Jekyll Island, and other anti-central-banker stuff.

14

Japan is very interesting in this. I wonder if it’s some strong traditional sense that is still anchoring their ways towards savings. I know over the years in the U.S. it has been said that Japan is becoming more and more western, but yet from various sources over the years I keep seeing a strong traditional sense that has been able to adapt to westernizing. So instead of, as how some sources have put it, Japan is westernizing, it’s more like, it seems, Japan is adopting its own western style based on a Japanese perspective. I think that would be a more precise way of describing it.

15

Japan is modernizing. Actually, as far as I’m concerned, Japan is already a modern country, so it’s somewhat silly to say that it is modernizing considering that it is modern already.

16

AJ, while you are there you may want to find out a couple things. What is the “deposit” rate at a local bank? What is the rate for a certificate of deposit?

Also, another important thing to point out is that the larcency rate in Japan is virtually 0. Thus, keeping cash in your home or on your person may actually be safer than putting it in a bank!!! See if you can find this sentiment to be true.

See if you can find opinions on economic outlook and financial security. A big difference between us and Japan is that our stock markets have been in a long-term bull market since the early 80’s while there’s has been in a long-term bear market since the early 90’s. I doubt the Japanese feel confident about retirement, 401(k)'s etc. Also, there late 80’s bubble was mostly in real estate, so I don’t think anyone thinks that’s a good retirement investment either.

Maybe they’re participating in our bubbles…see if you can get some opinions on foreign investment.

Of course, if you’re on vacation, enjoy yourself first!!!

17

Yeah, what an absurd view. I guess robotics is a relic of the dark ages.

Also, using modern in a manner that implies holistic economic/technological reasoning is inaccurate. Everything happening in the present is modern, no matter how uncivilized or uncomplicated it is.

18

I would have to say that this shows that the ABCT isn’t so silly after all, if you consider what’s been shown by meambobbo. In this case, the culture of the population of Japan offsets the ‘foreign’ inflationary policy. Quite an interesting effect. It makes me wish I was an Anthropology or Sociology graduate right now. It would be a damn cool doctoral dissertation to work on.

19

I think it’s just good old Japanese cautiousness.

In terms of consumer technology, Japan is years ahead of the US. However, ever since the Meiji Restoration over a century ago, Japanese have had a soft spot for anything new, trendy, and Western - so they fell for Keynesianism and central banking hook, line, and sinker.

One nice thing about Japan is the income tax is minimal, they hardly care about individual middle-income taxpayers, and even for businesses I hear that if you don’t pay and they audit you, you are just asked nicely to pay the portion in arrears. Plus you can start an LLC with capital of 1 yen.

20

Not sure about CDs or if they even have them, but the interest rate on my savings account at Sumitomi-Mitsubishi UFJ Bank is virtually zero. I remember a while back it was 0.43%.

Burglary is definitely lower, but it exists conspicuously despite a violent crime rate far below any other country. However, this may be precisely because people have so much loot at home, plus the ban on guns (and katana).

Yeah, I think this is true. I know a lot of people who have gold bullion lying around. There was a new law introduced last year requiring ID every time you sell gold, platinum, or silver - ostensibly to prevent money laundering. Hardy-har.

Sure enough, they are (or did). Like I say, they will invest in whatever is told to them by a “credible” authority, like the banking establishment. I’ll ask around.