Home > Causes of Inflation, Japan, Theory > Japanese Inflation is Rising – Of Course!

Japanese Inflation is Rising – Of Course!


The Financial Times today carried an article entitled “Japan Inflation Rises to Highest in Nearly Five Years.” Core inflation in Japan reached -0.1%, which is actually the highest since early 2009, so not quite five years (see chart, source Enduring Investments, below). More importantly, however, the year-on-year figures are near the highest in the last decade-plus, with base effects likely to push core inflation above zero in the near future.

japancoreThis should be shocking to no one, since Japanese M2 growth recently reached the highest year-on-year growth level since … wait for it … 1999, and is now actually growing slightly faster than European money supply for the first time in a long, long time. Because, you see, money growth is intimately related to inflation. News flash!!

But the Japanese have only just begun to increase their money supply, and it is going to go a lot higher. As will inflation in Japan.

Now, here’s the conundrum of the day. If the Japanese pat themselves on the back because they are near to exorcising the deflation demon with quantitative easing, then how can Bernanke, Yellen, Summers, et. al. be so confident that our QE will not increase inflation? It can’t be the case that QE is effective at ending deflation (which was one benefit that Bernanke trumpeted in the past, too), but doesn’t tend to increase inflation. Well, I suppose it can be the case, but it would be quite weird.

The difference between the US and Japanese response to money growth over the last few years is that money velocity in the US has been declining with interest rates, while the Japanese already had rates so low that velocity had nowhere to go but up. As I have noted previously, even if velocity in the US merely levels out, 7% money growth will produce an uncomfortable rise in inflation.

So before settling into the belief, as Summers has expressed, that quantitative easing has “few harmful side effects,” it seems to me that we ought to reflect on the Japanese QE example.

 

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  1. eric
    August 30, 2013 at 4:27 pm

    I’m sure what the fednicks believe is that, but for them, it would be 2001 in Japan for us right now. Other than housing, which is directly manipulated with fed purchases of mortgage bonds, its hard to know if that true or not. only time will tell for sure.

    • August 30, 2013 at 6:24 pm

      But in 2001, Japanese money growth was 3% (and went down to 1.5% in 2004). Inflation didn’t fall because of some weird “Japanese disease.” It fell because money growth was too low. If the fednicks believe that Japanese inflation fell for some other reason, it’s very sad.

      ________________________________

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