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Will These Two Factors Ensure Japan’s Escape from Deflation?

Many observers of global economies believe that governments have a big influence over those economies.

Relatedly, observers also believe that central bank policies have a lot to do with a nation’s inflation rate.

But, in his book, Conquer the Crash (2002), Robert Prechter called this the “potent directors” fallacy:

It is nearly impossible to find a treatise on macroeconomics today that does not assert or assume that the Federal Reserve Board has learned to control both our money and our economy. Many believe that it also possesses immense power to manipulate the stock market.

The very idea that it can do these things is false.

The book says the market, not a nation’s central bank, is in control of interest rates and the total supply of credit. Further, inflation and deflation are largely driven by the psychology of a country’s populace. In other words, when people are confident and optimistic, the economy tends to expand. On the other hand, a deep and persistently pessimistic psychology is condusive to deflation.

Japan’s Nikkei 225 has been in an uptrend, so the upticks in the nation’s economic strength is not surprising.

Now, Japan’s financial authorities are looking to add their own “oomph” in getting rid of deflation:

Read this excerpt from a Nov. 16 Reuters article:

Japan’s economy minister says policy needs to focus on raising productivity and wages to ensure an escape from deflation as the government prepares to announce a stimulus package [in December].

The economy, in the midst of its longest unbroken run of growth in more than 15 years, is showing positive signs that it can shake off the risk of deflation due to an improving output gap, said Economy Minister Toshimitsu Motegi.

However, consumer prices have been slow to rise, and Motegi says the key is encouraging more corporate investment and more spending on training workers so they can secure higher-paying jobs.

“The situation is starting to change,” Motegi said after a meeting of the government’s top advisory panel.

“There are a lot of improvements in the economy that point toward an end to deflation. To make sure this happens, we need to focus on productivity and wages.”

Vanquishing deflation, or a state of falling prices that has weighed on Japan for more than 15 years, has been among the top goals of the Bank of Japan and Prime Minister Shinzo Abe since he came to power in late 2012.

Recent positive economic signs suggest Japan is breaking out the grip of deflation that has stunted growth for years … .

Private-sector members of the panel expressed concern that prices for services were sluggish and that improvements in productivity for some manufacturers had not lifted wages, according to a government official.

When the Nikkei enters its next downturn, expect negative economic news to follow, despite the best efforts of government.

Read the full article here.

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