Time and time again I hear the mantra that low interest rates inevitably leads to high inflation - but how come Japan has managed to have a combination of near zero interest rates and near zero inflation for such a long time?..
The Japanese culture encourages vigorous savings, so the money as it is entering the market will leave at a rate approximately equal to its entrance.
If the supply of money in Japan remained constant, then what would happen?
Pretty much nothing. Think of it as a fire cracker that has too little of the active ingredients to go boom: a dud. Also, there are other factors involved in the lost decade that lead to the further decline of Japan on the world scene. One of them was their over investment in real estate within their borders and on the east coast of the United States (oddly many of those holdings are now Dutch owned).
Ok… now I would guess that Americans have been so traumatised losing all that money on housing, and having their pension funds devastated, that they will now en masse be desperate to save. This means that perhaps there won’t be hyperinflation in the US after all.
Original poster,
what’s your definition of inflation? Monetary inflation or price inflation?
That is what has got caught in Krugman’s craw. The boy thinks inflation is good without realizing that inflation does not lead to productivity. But don’t bother telling him that, he’s still stuck on stupid for Keynes.
either.
I presume that Japan has had low levels of both types of inflation for a long time (please correct me if I’m wrong).
The question is low interest rates for whom? If the banks are getting 0.1% short term loans from the central bank, but everyone else has to get a 5% long-term loan on his mortgage on a depreciating asset, that’s not low interest rates.
In Japan, loan companies like Takefuji routinely charge 20-30%.
Really??.. presumably that’s just for the most high risk customers. What if a long established business wants to borrow money to expand?
Dunno, but I think multi-year home loan rates are around 2-3%. Takefuji is basically for payday-style loans.
25% savings rate. 0% market rate of interest in Japan is not the same as a 0% market rate of interest in the U.S.
These answers are all rather brief - presumably someone somewhere has written about this in a little detail - can someone give me a good link?
For a business to expand it must first identify a profitable investment opportunity. If the economy was not liquidated after a previous bust, then there will not be any such opportunities, and so there will not be business borrowing, and so there will not be fractional reserve inflation.
Are you saying that artificially-low interest rates must cause prices to increase? If so, that is incorrect. Prices could decrease because of higher productivity, but inflation of the money supply could counteract that price-deflation, thus, causing prices to remain unchanged. Besides, prove to me that Japan has not had price inflation.
That’s a very interesting point.
The Bank of Japan can have such low interest rates because the Japanese public saves much of their money. A high savings rate lowers the natural interest rate significantly.
It’s possible if savings rates over a long term increase in general, but I’m suspect to that in the US. I think eventually, spending will increase by consumers and you will see similar levels of consumption.
In any case, rising prices does not equal better economy, all things remaining equal.
I’m not really a fan of the concept of the liquidity trap, I think it largely misses how the economy works by bastardizing monetary policy as a tool to promote economic growth in itself.
The Yen doesn’t look to me like a very strong currency for all products that are manufactured in japan. Isn’t that beacuse of inflation? I thought that is why Videogame arcades are more popular in japan over consoles(just like in mexico) because its cheaper.