uploads///Quarterly Inflation Indicators

A look at deflation in Japan


Dec. 17 2014, Updated 12:38 p.m. ET

A slow poison

In his speech at the Statesmen’s Forum, Tarō Asō described deflation as “slow motion death.” He said that initially it doesn’t feel bad because even though wages may not rise, you don’t feel the pinch, as inflation is nearly flat. Unlike inflation, deflation doesn’t raise eyebrows because it happens gradually, like a poison that works very slowly. But by the time you realizes the vicelike grip of deflation, it’s already too late.

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How did deflation begin?

A look at Japan’s quarterly inflation metrics shows the struggle Japan has had against inflation in this millennium. Japan’s deflation began in in early 1990s when the asset price bubble burst. Land prices, which began declining in 1991, continued to decline even though the pace slowed.

The above graph shows how, after double-digit expansion in March 1990, land prices fell across segments. The effect on commercial prices was much more severe than residential or industrial prices. The graph below shows the average price decline across these three segments every six months since March 2010.

Reasons for Japan’s deflation

In a Bank of Japan working paper titled “Chronic Deflation in Japan,” authors Kenji Nishizaki, Toshitaka Sekine, and Yoichi Ueno put forth a host of reasons for the persistent deflation in Japan. Among them are the following:

  • Public attitudes toward the price level
  • Central bank communication
  • Weaker growth expectations coupled with declining potential growth or the lower natural rate of interest
  • Risk averse banking behavior
  • Rise of emerging economies

They assembled these reasons based on a conference held jointly by the Research and Statistics Department of the Bank of Japan and the Center for Advanced Research in Finance of the University of Tokyo in November 2011.

After a technical review of all these reasons, the authors concluded that these, along with other reasons, are all suppositions. Although they didn’t pinpoint a specific explanation for Japan’s deflation, they concluded that a combination of these reasons may be responsible for the deflation.

Further research may reveal the reasons for Japan’s deflation, which affected stock markets and related exchange-traded funds (or ETFs) such as MAXIS Nikkei 225 ETF (NKY), iShares MSCI Japan Index Fund (EWJ), and WisdomTree Japan Hedged Equity Fund (DXJ).

Even though conquering deflation is still a work in progress for Japan, a turnaround in the Japanese economy will bode well for investors in ETFs (EFA) (VEA) (VPL), which have more than 20% exposure to Japanese stocks.

In the next article in this series, we’ll take a look at the impact Abenomics has had.


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