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Japan, Deflation and a “Dearth of Confidence”

Originally published by Asia Times on June 10, 2018 Read the original article.

Robert Prechter’s book, Conquer the Crash, states:

The psychological aspect of deflation … cannot be overstated. … As consumers become more conservative, they save more and spend less. These behaviors reduce the “velocity” of money, i.e., the speed with which it circulates to makes purchases, thus putting downside pressure on prices.

The above encapsulates what’s still going on in Japan.

This next excerpt is from a June 10 Asia Times article:

The Group of Seven (G7) meetings of the last 10 days were real downers for Japan’s Haruhiko Kuroda.

In recent years, the Bank of Japan (BoJ) governor ran a kind of mentorship program for peers, many of which confront the same deflationary forces plaguing Tokyo. Neither the Federal Reserve nor European Central Bank nor Bank of England is suffering from Japan-like price declines. But chronically weak wages are a G-7 phenomenon despite today’s rare synchronized growth cycle.

As Kuroda – five-plus years into his own battle – wonders where things went wrong, he might reflect on the warnings of his BOJ predecessor. That goes for the rest of the G-7, too.

After running the BOJ from 2008 to 2013, Masaaki Shirakawa ran aground of Prime Minister Shinzo Abe’s reflation campaign. Abe felt Shirakawa was too laid back on generating inflation. He empowered Kuroda to launch an overwhelming assault on the “deflationary mindset.”

All along, though, Shirakawa knew his successor would fail and it’s worth remembering why.

As Shirakawa warned, the chronic weakness in pricing power had nothing to do with the teachings of Milton Friedman. It isn’t about the supply of yen in the system, but uses for it. The real cause of Japan’s deflation: dismal demographics and a dearth of confidence. Older consumers, and Japan has a fast-growing number of them, spend frugally. Younger ones, who grew up only knowing deflation, tend not to spend much either. [emphasis added]

You can read the entire article here.

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