Japan Bucking the 2021 Trend to Higher Inflation Around the World

November 19, 2021

The sharper-than-forecast rise of inflation almost everywhere and recent further intensification of price pressures in many places has been a big mystery and source of great dispute over the trend’s future evolution. A centrally dynamic role of oil and food prices, as was the case in the 1970s, is magnifying inflationary fears, but there are also anomalies from that earlier bout of runaway prices and wages, and that is the notable exception of Japan this time.

Today’s report of Japanese consumer prices in October revealed a seasonally adjusted monthly drop of both total CPI and the CPI sub-index excluding both fresh food and energy. 0.5% monthly drops in consumer service prices in both August and October flanked a 0.0% change in September. In year-on-year terms, both total CPI and the CPI excluding perishable food were up just 0.1%, and consumer prices excluding fresh food and energy were 0.7% lower than a year earlier. In the 1970s, when oil price shocks in 1974 and 1979 sent overall inflation rocketing upward, Japan was not spared: CPI inflation crested at 24% in the first quarter of 1974 and around 9% in September 1980.

There may be broader implications to Japan’s exceptionalism when it comes to price stability. Among major industrial economies, Japan has been the most deflationary case, but many other countries flirted during the past ten years with succumbing to what happened in Japan. At a minimum, Japan’s continuing bout of excessively low inflation in 2021 serves as a reminder of the asymmetric problems for policymakers fighting inflation or deflation. Inflation can always be stemmed. Former Fed Chairman Volcker proved that. Deflation is like a black hole. Once an economy is ensnared, the return to low and stable prices becomes extraordinarily elusive, if not impossible. Bear in mind, too, that deflation carries additional risks of low secular growth and equity market weakness (the Nikkei even now is 24% below its record high on the final business day of 1989). With much confusion and disagreement surrounding the outlook for inflation, central bankers are right to approach the problem patiently and not impulsively.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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