Japan’s Deflation Persistence

It's deflating...

Is it all about the age of the population?

One in four people in Japan will be older than 65 in 2014, compared with 9.6 percent in China and 14.2 percent in the U.S., according to data compiled by the U.S. Census Bureau.

Now, because they have had longer to accrue weal the older people tend to have more savings, or have retired and live in a fixed income, and therefore benefit from deflation But correlation is not causation. Certainly, Japan’s older population loves deflation. But the issue is the love of deflation, not the age of the population, per se. More than 80 percent of respondents in a Bank of Japan (8301) survey released this month who noticed rising prices last year said it was bad. Deflation-loving Japanese voters are the main stumbling block to Abe and Kuroda’s desire to reflate the Japanese economy back to inflation (to incentivise borrowing) and growth.

One of the peculiarities of state-backed fiat money is that it is a medium of exchange that the people of a state are expected to share. Clearly, individuals existing in a state will by definition have different motivations, different time preferences, and different conceptions of what constitutes good money. Different individuals have different preferences for inflation and deflation — while deflation helps savers, younger generations without savings are hit by stagnant wages and diminished incentives for borrowing. Inflation incentivises borrowing, and deflation incentivises saving, but these things are both to a great degree two sides of the same coin — deposited savings are lent out by banks. So when a population comes to love deflation and savings soar — and about 56 percent of household assets were in cash or bank deposits in 2012, according to a Bank of Japan report — the glut of savings depresses interests rates. With the value of savings rising, savers have little incentive to spend. This, ceteris paribus, constrains spending.

Abe and Kuroda are fighting to break Japan out of the liquidity trap. They have specific growth and inflation targets — 1% inflation, and 3% income growth and have a clear plan to hit those targets. But fighting against the widely-desired status quo — that is, deflation — in a democratic state is difficult. If Japanese people love deflation, they will vote for it at the polls. If Abe and Kuroda are to succeed in reigniting inflation, they need to convince Japanese savers to change their minds about inflation, and challenge the idea that saving in Yen is a desirable thing. After all, saving is not confined solely to the state-backed fiat currency. In a more inflationary environment, savers often choose to save through ownership of assets whose prices are increasing — land, real estate, commodities and currencies other than the state-backed fiat currency. In principle, there is no reason why Japan’s ageing population may not prove capable of moving its desire for savings into different media, and letting the Yen inflate. In practice, deflation and saving in Yen is cemented as a norm. That may prove extremely difficult to overcome.

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16 thoughts on “Japan’s Deflation Persistence

  1. “…while deflation helps savers, younger generations without savings are hit by stagnant wages and diminished incentives for borrowing”

    The fact that younger generations don’t have savings to start out their working life isn’t surprising, and isn’t the result of deflation. But stagnant wages in an environment of deflation means a rise in real wages, which helps in the building of savings as a less percentage of ones’ earnings are needed to buy the same goods. This not only enables the opportunity to build savings, but reduces the chances they need to borrow heavily in the first place. That’s not a problem. I feel that a lot of contemporary views on the horrors of deflation assume today’s highly leveraged, overindebted world is somehow normal or what things are supposed to be like.

    “Inflation incentivises borrowing, and deflation incentivises saving, but these things are both to a great degree two sides of the same coin — deposited savings are lent out by banks. So when a population comes to love deflation and savings soar — and about 56 percent of household assets were in cash or bank deposits in 2012, according to a Bank of Japan report — the glut of savings depresses interests rates.”

    Inflation or deflation in and of itself doesn’t incentivise anything…inflation and deflation are effects of changes in factors affecting supply and demand. As for increased savings leading to interest rates: I agree, and that is exactly how a market that sets interest rates is supposed to work. A higher rate of savings augments the funds available for lending which depresses the interest rate. Lower cost of borrowing may make more projects worthwhile investments, but the key is that they are supported by real savings, which prior elevated interest rates helped to attract. There is no ‘glut’, if the investments made profitable by low interest rates are desired, those savings are necessary.

    “After all, saving is not confined solely to the state-backed fiat currency. In a more inflationary environment, savers often choose to save through ownership of assets whose prices are increasing — land, real estate, commodities and currencies other than the state-backed fiat currency. In principle, there is no reason why Japan’s ageing population may not prove capable of moving its desire for savings into different media, and letting the Yen inflate.”

    The problem with moving to different media is that it forces the ageing population (and anyone else looking to keep his/her head above water) to become risk loving speculators. Anything short of becoming overnight experts in the fundamentals of real estate, commodity, equity, and currency movements is tantamount to gambling. Ordinary people who are generally risk averse should not be forced into playing in dangerous financial markets against professionals just to retire, and thus should have some risk averse option in which to put their savings. Like saving in a bank at a decent real return. As you state yourself, such an environment, with increased savings ends up lowering the rate of interest. That way, anyone who does want to stick their neck out, and has the willingness to undertake the diligence required, can borrow relatively cheaply to fund their endeavours.

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  4. Deflation works to the benefit of ALL in a sound money environment.

    In a debt-money system, only inflation works [and it only works for the very few].

    It’s a simple as that.

      • There’s nothing that suggests that the debts people take on in a ‘sound money environment’ are somehow impossible to repay just because there is no inflation. The fact that the real value of ones debt may increase in a deflationary environment is offset by the fact that the real cost of living is decreasing. Even if one were to get overextended and declare bankruptcy, it wouldn’t necessarily be ruinous given in a world of falling prices, the likelihood of needing to access debt to ones eyeballs just to afford taken for granted amenities like a car, house, insurance and education would be far diminished.

        • In a sound money environment, there is a great deal less need to take on debt [if any], the point being that you can save for what you need as your savings increase in value as the price of commodities decrease.

          It’s simply a matter of who controls money, those who use it as a store of value [all people], or those who create/distribute [the very few]. In the present system [controlled by bankers] does it not make sense that they would create a system maximally beneficial to themselves?

          Paying back the loan is not at issue, instead, it’s the overall effect of debt and what it portends in every society that has ever welcomed this pariah into it midst [great poverty, great wealth, political/economic instability, etc.].

          And from a purely practical standpoint, borrowing from the future is as bad of an idea as is allowing people to profit from such. People have known this for thousands of years!

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  6. One might imagine that after going through so many financial and economic crises over the past 100 years, people might begin to understand what people on this planet have understood for thousands of years, that debt is pure EVIL.

    That is not to say that it can not be used in ways that may help a society [e.g., improving a water/waste-water system, etc.], but if you are going to fund a project such as this, then it must be handled very carefully, will a great deal of attention paid to fraud.

    Personal debt is the main problem. Even in a sound money system [where the money being lent is real money (savings)], history has shown that a great percentage of the population can be manipulated [are ignorant enough] to get into trouble with debt, and this ensures a quick right turn down the road of misery.

    And even if the banking system had rules tilted in favor of the borrower, this would only attenuate the malodorous social effects of bringing future spending forward, thereby slowing the wealth disparity/political instability created by the financialisation process.

    Now, many say, look at housing and see how people have been able to live so much better by amortizing its cost over x years. Well, I say, how much do you think a house would cost if you had to pay cash for it? How much would people SAVE if this was the case? How much more careful would people be with their money?

    The one thing debt does create is a class of super-wealthy parasites that use their power to do all the wonderful things powerful human being seem to enjoy, particularly, the employment of EVERY means of furthering their quest to get even more, ‘something for nothing,’ as there simply appears to be no limit to human greed.

    Debt is the Devil’s tool [metaphorically]. It is every beautiful woman who has ever lived offering you whatever you want in exchange for your very essence as a free human being.

    Debt-slavery [on a mass scale] is the logical conclusion of the nation-state, an institution used by the few to capture [then enforce] and abduct labor-value, not only in the present, but in the future, as well.

    As it has been written, the most effective way to control people is not with words or weapons, but instead, through their desires, and debt is simply the most effective method of imposing this control.

  7. Aziz,

    What makes you think the Japanese like deflation? I suggest what they like is very high levels of savings compared to the West, and that has an obvious deflationary effect. But I’d question your idea that they “like deflation”.

    • If you go to the store and the vegetables you bought last month for $15. now cost $14., this is something people like, be they Japanese, Chinese, Mongolian, etc.

    • I’ve read these kinds of critiques before regarding differentiating between different kinds of deflation. All I can say is that such judgments are subjective in nature…

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