Why is there no inflation?

I just came back from Japan recently & I was surprised to discover that the price of an item I bought almost 10 years ago still remained the same! I wonder why, because in my country, it is very common to have price increase almost every other year. So much so that people come to expect a price increase with the passing of every year.

Is the constant price a reflection of Japan's vast resources? Since it has many factories & natural resources, it is not subjected to external influences such as prices of necessary imports, as much as a country whose only resource is its people.

Itfs because Japan has been suffering from the economic state called gdeflation spiralh for a decade. Deflation is a state when there are so many products and services available in the market, but consumers stop buying them.

When the deflation first started, consumers stop buying products or going to dine out because they know things would be cheaper maybe tomorrow. Because of psychological effect, business start suffering and has to cut cost in order to meet the lowered demand, by slashing prices of the products or services.

Companies first cut costs by getting cheaper raw materials and foods, and this was possible due to Yenfs overly strong value and more competitive pricing materials from China and other countries. You seem to think that Japan has gvast resourcesh but in fact, what Japan is good at is making the final products or, median products such as high-end steals and high-tech machineries to make final products. To make products we need things like oil, iron ore, logs and rare-earth minerals but Japan rely these raw materials for imports. Even 60% of foods are imported today.

So companies try their best by finding lower materials but thatfs not enough. The next step for companies is to focus on streamlining the manufacturing processes such as shutting down offices or relocating factories overseas. And then, they start cutting human costs. When people get lower wedges, they cannot afford to buy high value products, and therefore they hesitate to consume, driving business to slash prices and services even lower. This spiral has continued for years.

You can see what deflation has done to Japan by looking at GDP per capita. Japanese used to earn 54,000 USD per person 15 years ago, but today, we make 45,000 USD. Ifm not an economist but I think we can also say that Japanese business lost competitiveness due to this deflation state.

Hopefully, our new administration can stimulate economy by publishing more Yen and National bonds to promote business and create jobs. Itfs good for consumers when things get cheaper, but it means nothing if people donft have enough money to spend.

Hi jomonstrider,

That is a well-thought answer. However I am kind of baffled when you said people do not have enough money to spend. I just came back from Japan recently. Whenever I was at any shopping centre, it was so crowded! Especially the restaurants! One would think that Japan is not going through a deflation just by looking at the throng of people dining out.

Yes, I hope Abe administration can get BOJ to print more yen, so hopefully the value of yen will continue to drop & tourists get to benefit. However, I wonder what is the relationship between 2% targeted inflation & drop in yen, because if there is inflation, then any monetary advantages tourists have will be eroded quickly.

The value of the yen will "continue" to drop ?
I guess that depends on the currency you compare it to, cause compared to Euro, the Yen is almost at its highest since 10 years..
(lowest was around 2007 as I recall buying 180Y for 1 euro, while now it's about 100Y per euro)

Hi Riverwalk,

Yeah. But we were spending far more in the early 90fs. I was just a kid but I could feel even the air was gold back then:)

But honestly, the spending patterns of Japanese has changed a lot during these years. Maybe you see us sitting on the restaurants, walking on the streets, and looking at the store's windows, but what we eat, and how we spend isn't the same.

Ifm not sure how the inflation would take an effect, but many Japanese businesses had survived this deflation spiral and their foundations became much stronger. I would imagine that, many businesses will enjoy more customers with keeping products and services in the same price ranges, than suddenly raising prices for quick gains. Even the government met with 2% inflation target by the end of this year, I donft think things will change so drastically, at least for a while.

12% of GDP owes to tourist industry today. We think of Japan was an exporting country but its ratio against GDP is as same as tourism. Meeting the demands of tourists are becoming serious matters, and if Tokyo could host 2020 Olympic, that would really help Japan I believe.

Hi FrenchDude,

You know the answer... Euro is a mess. But take a look at the currency exchange and you'll see even Euro is skyrocketing against Yen since 10th of December.