Inflation in Japan and Canada: Too Little of a Bad Thing

January 25, 2013

Conservatives around the world have been warning since 2009 that heavy doses of monetary accommodation and fiscal deficit spending will lead to an unacceptably large increase of inflation.  The major surprise on the price front in country after country has been lower-than-anticipated inflation.  Analysts and politicians have been hard-wired to believe that inflation is intrinsically bad and that lessening price pressure is always good.  That ain’t necessarily so.  Falling prices, also known as deflation, is more troublesome because it is harder to fix than excessive inflation.  Two countries with excessively low inflation reported December CPI data today.

Japanese consumer prices fell on average at a 0.8% per year pace during the three years to 2011.  They were unchanged in year average terms in 2012 and 0.1% lower in December 2012 than in December 2011 despite a 3.4% advance in energy.  Excluding seasonally fresh food and energy, Japan’s consumer prices imploded 1.0% a year in 2009-11 and by 0.6% last year.  Not coincidentally, this continuing spell of deflation was associated with a marginal net drop of real GDP between the third quarter of 2008 and the third quarter of 2012.

Between the ends of 2011 and 2012 in Canada, consumer prices increased just 0.8%, merely a third as much as the 2.3% rise over the previous twelve months. In terms of calendar year averages, inflation slowed to 1.5% in 2012 from 2.9% in 2011 and was below the average pace of 1.8% per annum since 1992.  Core consumer prices in Canada were just 1.1% higher last month than in December 2011.  That’s down from a 12-month increase of 1.9% in the prior dozen months.  Consumer prices for goods were unchanged on year, while service sector prices had increased 1.6%, down from 2.2% in the year to December 2011.

Canada used to experience chronically elevated inflation until a program of inflation reduction followed by inflation containment at an ultimate 2% target was adopted in the early 1990s.  Long after most central banks adopted quantitative inflation mandates, the Bank of Japan held out until a year ago.  Only now has the BOJ leadership reluctantly agreed to a target that’s in line with other central banking norms, 2.0%, and linked progress toward that objective with ongoing monetary policymaking.  It remains conspicuous, however, that central bank officials did not assign a deadline for reaching 2% inflation, and that omission cannot but hurt the credibility of the new policy stance.  The sooner that Japanese medium-term price expectations adjust to 2%, the sooner that actual inflation will climb to that level as well.

Copyright Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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