Deflation Intensifies in Japan

Japan's fourth quarter real Gross Domestic Product rose more than expected--4.6% at an annual rate. However, the third quarter was revised downward from 1.3% annual rate to no change. The biggest contributor to growth was foreign trade: exports increased 21.7% (saar) while imports increased only 5.3% (saar). Data for inventories are not yet available, so there are no data for Gross Capital Formation, but Fixed Capital Formation showed only a minimal decline after four quarters of double digit declines (The fourth quarter of 2008, not shown below, declined 17.3% (saar). Nominal GDP rose only 0.9% at an annual rate. As a result, deflation intensified. The first chart shows the widening gap between real and nominal GDP.

Masaaki Shirakawa, Governor of the Bank of Japan, recently addressed the problem of deflation in a January 29, 2010 speech. The rationalization of the distribution system and deregulation of the eighties and nineties played a significant and benign role in reducing Japan's high cost economy; but once the price level had become more in line with that of other developed countries, the continued decline in prices has become malign. Fundamentally, the cause of deflation is decreased demand and its cure, increased demand. But, since the latter half of the nineties, there has been an almost continuous decline in wages accompanied by a decline in expectations of further growth both of which have tended to reduce demand. Governor Shirakawa stressed measures that would improve the economic structure of the economy rather than monetary expansion to increase demand.He urged the Japanese to make the most of global demand, especially from emerging and developing economies by introducing more flexibility in their economic structure, easing entries and exits of businesses and encouraging the development of new products.