Japan still deflationary

May 30, 2007

The latest data from Japan discussed in today's Financial Times (page 2 "Japan jobless at nine year low as recovery widens " by David Pilling and Mariko Sanchanta)show that despite low unemployment- the rate has now dropped to 3.8 % a nine year low, prices continue to fall.
The Bank of Japan measure of inflation including energy costs is now running at minus 0.2 %. Japan is growing at about 2 % per year but despite this and the low unemployment wages have not responded and Japanese household disposable income has fallen by 0.4 % from a year ago last April.

This suggests that global conditions are far from inflationary as Japan is the world's third largest economy.The likely explanation for this is the stiff wage competition from nearby China which makes it very difficult for unions to raise prices of their members labour.

This deflationary aspect of globalization and the new technologies is not well understood yet by policy makers and central bank officials who continue to raise interest rates inappropriately. The Bank of Japan, despite falling prices, raised its interest rate from zero to 0.5 % over the past seven months. They claim to see reflation on the horizon but it has not happened yet and may not for some time.