A NYT article that reported on the declining importance of
manufacturing to Japan's economy at one point referred to: "the crushing
deflation that has burdened Japan's domestic economy for nearly two
decades."
Actually, Japan has experienced modest inflation rather than deflation
for most of the last two decades. Even when prices did fall, the rate of
decline has been slow, exceeding 1.0 percent only in 2009, in the wake
of the world financial crisis.
Japan, like other countries, suffers from having an inflation rate that
is too low. This is a problem because nominal interest rates cannot
fall below zero. It would be desirable to have a large negative real
interest rate at present (the real interest rate is the interest rate
minus the inflation rate), but this is not possible when inflation is a
low positive number or a negative number.
The fact that the inflation rate is below zero has no special
importance in this story. The decline in the inflation rate from a
positive 0.5 percent to a negative 0.5 percent is now worse than a
decline in the inflation rate from a positive 1.5 percent to a negative
1.5 percent.
This fact can be seen clearly if we remember that the rate of inflation is an aggregate of tens of thousands of price changes across the economy. When the inflation rate is near zero many of these price changes will be negative, meaning that the prices of some goods are falling. (Computer prices have been falling rapidly in the United States for decades.) When the rate of inflation goes from a small positive number to a small negative number it simply means that the percentage of items with falling prices has risen. It is difficult to see how that could amount to some sort of calamity.
This point is important because the obsession with deflation has been a serious distraction in policy debates. Many have implied that the Fed and other central banks have been successful in their anti-recession policy because they have managed to avoid deflation. This is not true. They have in fact failed because they have not been able to lower the real interest rate as much as would be desirable given the weakness of the economy.
http://www.businessinsider.com/japan-has-not-suffered-from-crushing-deflation-2012-4
This fact can be seen clearly if we remember that the rate of inflation is an aggregate of tens of thousands of price changes across the economy. When the inflation rate is near zero many of these price changes will be negative, meaning that the prices of some goods are falling. (Computer prices have been falling rapidly in the United States for decades.) When the rate of inflation goes from a small positive number to a small negative number it simply means that the percentage of items with falling prices has risen. It is difficult to see how that could amount to some sort of calamity.
This point is important because the obsession with deflation has been a serious distraction in policy debates. Many have implied that the Fed and other central banks have been successful in their anti-recession policy because they have managed to avoid deflation. This is not true. They have in fact failed because they have not been able to lower the real interest rate as much as would be desirable given the weakness of the economy.
http://www.businessinsider.com/japan-has-not-suffered-from-crushing-deflation-2012-4
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