Quick Digression on Japan’s Upcoming Election

Readers may know that Japan has been my second home in adulthood. It’s holding a general election on Sunday, December 16, which affords me a reasonable excuse to editorialize away from anything education-related.

After running on a platform of fighting consumption tax increases, the Democratic Party of Japan turned around and voted to double the consumption tax to 10 percent by 2015, causing a party split. Of course a consumption tax is a terrible idea and will slow consumer spending.

Japan’s problem is still deflation. Really bad deflation. Not in consumer prices but in the GDP deflator, which I get from the IMF and FRED to extend it from 1991 to now.Japan Deflation (1991=100)

Japan Price Indexes (Year-on-Year Change)

I’m not the first person to notice this (it’d really scary if I were), but starting from when Japan’s infamous real estate bubble popped in 1991 until 2010, its prices dropped nearly 13 percent even though consumer prices rose 2.3 percent. I can’t say whether Japan’s CPI is calculated identically to the U.S.’s, but as Lars Christensen notes, governments gingerly bake consumption tax increases into their CPIs. The CPI also excludes real estate prices, using instead rental equivalence, and it includes imports’ prices (especially energy in Japan’s case). Land prices are included in the deflator, so as the cost of land drops you see general deflation. Why shelter or rent prices don’t detect this I can’t say, but a baby bust bakes in more deflation expectations because buying land is perceived as a losing bet in the long run, particularly in rural areas.

The consumption tax hike means the deflation will continue, unless the Liberal Democratic Party makes good on its threats to ensure that the Bank of Japan targets a higher inflation rate. As you can see, though, even a two percent target is much too low.

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