To Deflationists: Don't Cite Japan as America's Future

Japan may have no choice, with dwindling population.

There is a battle going on, increasingly on the blogsphere, between so-called deflationists and so-called inflationists. Most of them talk about price inflation/deflation, while others talk strictly about monetary inflation/deflation. Some switch between the two to fit their argument of the moment.

One of the arguments by so-called deflationists is Japan. Look at Japan, they've been doing for two full decades what the U.S. has started to do (QE, near-zero interest rate to help big banks repair their battered balance sheet, etc.) and what have they got? Price deflation!

It doesn't quite matter to them that price deflation in Japan (called "price destruction" in Japan) has never been more than 2% on the annual basis.

The new Japanese administration, just like the old one and just like the new one in the U.S., is frantically trying to re-inflate, calling deflation "unacceptable". But Japan, compared to the U.S., has one fatal (I think) disadvantage in their misguided effort to re-inflate: Population decline.

Population in Japan decreased for the 3rd straight year
(1/1/2010 Yomiuri Shinbun; original is in Japanese)

"According to the estimate by the Ministry of Health, Labor and Welfare, the number of deaths in Japan in 2009 exceeded the number of births by 75,000, making it a third straight year of population decline.

"The difference of 75,000 is the largest since the end of World War II.

"In 2009, there were 1,144,000 deaths (increase of 2,000 from previous year) and 1,069,000 births (decrease of 22,000 from previous year). Japan's population started to decrease in 2005 for the first time since the end of World War II.

"The Ministry officials believe the pace of population decline will accelerate further."

With ever-decreasing population, demands for goods and services naturally decline. What could the providers of goods and services do, other than to lower the prices to entice the dwindling number of buyers?

I wouldn't be surprised if Prime Minister Hatoyama tried to spin this population decline as a "wave of the future" for a sustainable, greener world.

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