Arnold Kling

Japan's Deflation

Arnold Kling, Great Questions of Economics
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Japan is high on the international worry list. For instance, this article in Forbes says,

[The ratio of debt to GDP is] being made worse month by month, year by year, by deflation, which at perhaps 4% annually in Japan (measured in consumer prices) is the most pronounced in the world.

In the National Review online, David Malpass says that

Japan is already awash in liquidity. But this liquidity would allow the country's economy to grow fast if the central bank committed to a new course and broke the deflation expectations.

Paul Krugman, the economist (not to be confused with Paul Krugman, the N.Y. Times columnist), wrote years ago, and no doubt would still say,

the natural answer to Japan's liquidity trap is a deliberate, announced policy of moderate inflation... Instead conventional "canons of soundness" - a continuing commitment to stable prices and to a strong or at least not too weak yen - have thus far prevailed.

Krugman, a liberal, would like to see monetary ease to the point where there is some inflation in Japan. Malpass, a conservative, would be happy just to see an end to deflation. But both see the Japanese monetary authorities as obstinately refusing to expand the money supply sufficiently.

Discussion Question. If Japan continues to experience deflation, to what extent will this deflation be "exported" to other countries?

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