The Blessings of Deflation in Japan

by Stefan Karlsson

We have all heard how deflation is supposed to prevent growth and create a economic depression. Yet for the latest 2 quarters Japan has outperformed the US not to mention the UK and the Euro zone with a growth rate of more than 6% at an annual rate compared to 4% in the US and even lower in Western Europe, according to the latest report. This is "despite" a consumer-price deflation of 1,6% at an annual rate for the last 2 quarters. The boom seems relatively healthy given that it is entirely driven by soaring private domestic demand and a rising trade surplus, while government spending is flat. Broad money supply is also rising at the relatively modest 1,9% according to the Bank of Japan.

Another interesting feature of Japan's growth is that while US protectionists claim that the rise of China is a threat to the US economy, in Japan people know that China's boom is benefiting them. Of course, Japanese companies have "outsourced" much production to China but as this has increased Chinese growth and business ties with Japan, Japanese exports to China has soared.