Why no inflation in Japan?

bearing01:

 

What you're saying then is that the economy does not grow.  There are never any changing or new desires or needs that want to be fulfilled that are not already.  Only the purchase of cheap equipment during liquidation sales enables entrepreneurs to continue the same production that the previously failed business was doing.

That's not what I'm saying. I'm saying if prices remain above the market price, then there will not be profit opportunities.

High household savings is not a reason why there hasn't been a large increase in the general price level in Japan.  The following graph is shows the trend in household savings in Japan:

http://www.economicthought.net/wp-content/uploads/2009/07/Household-savings-in-Japan.png

This one shows and compares household savings in five different countries, including Japan and the United States:

http://www.economicthought.net/wp-content/uploads/2009/07/Household-savings-Japan-US-France-Canada-Germany.bmp

They are higher than the United States', but are not high enough to offset the expansion of the money supply by the Japanese central bank (and, if the natural interest rates were actually that low, then the central bank would not have had to expand credit as much as it did to maintain low interest rates in Japan).  The explenation is elsewhere: including that there is price inflation, because otherwise there would have been steep price deflation, and there is high demand for cash (and/or uncontrolled bank reserves are contracting at a similar [or faster] pace than controlled bank reserves are growing; this is a similar case as the United States during the first four years of the Great Depression, as analyzed by Murray Rothbard).

Jonathan M. F. Catalán:

The explenation is elsewhere: including that there is price inflation, because otherwise there would have been steep price deflation, and there is high demand for cash (and/or uncontrolled bank reserves are contracting at a similar [or faster] pace than controlled bank reserves are growing;

I think this is basically correct. My only quibble has to do with the part about reserves.  This theoretically could be a cause of price deflation, but this situation is not applicable in either the Japan and the U.S. today because, while fiduciary media (bank credit created through the fractional reserve process) has contracted, the difference has been more than made up for by an increase in the monetary base.  Thus the overall money stock has been increasing. 

You hear a lot of people saying that the contraction in bank credit has been responsible for a general price deflation (in the US today,),  but this is incorrect because the overall money stock never contracted. The contraction in bank credit has led to localized price deflation (real estate for example), but cannot be responsible, in the current environment, for an overall fall in prices.  The real cause has been an increase in the demand to hold cash.

mickanomics:

Time and time again I hear the mantra that low interest rates inevitably leads to high inflation - but how come Japan has managed to have a combination of near zero interest rates and near zero inflation for such a long time?...

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Well first off your definition of inflation matters here, monetary expansion is a kind of inflation so they clearly inflated in that way.  As to why prices were not generally observed to rise I think it's necessary to keep in mind that Japan isn't an Autarchic society.  There was quite a famous financial system with Japan at its heart called the "Carry Trade" which seen large quantities of currency loaned from countries with low interest rates to countries with high interest rates, it's one of the main sources of all the money the Icelandic banks were playing about with.  That's why you seen what would otherwise be a strange occurrence, which is that the Yen increased in purchasing power within Japan but was quite weak on the currency markets even thought the currencies it was losing value against were losing purchasing power within their own countries.  The reason was that there was such large outflows of Yen from Japan to other countries like Iceland; New  Zealand and many others, that’s why you didn’t see general price rises as you might expect from all the monetary inflation from the Japanese banking system.

Lohengram:

The reason was that there was such large outflows of Yen from Japan to other countries like Iceland; New  Zealand and many others, that’s why you didn’t see general price rises as you might expect from all the monetary inflation from the Japanese banking system.

This is wrong.

It's true there was a huge carry trade, but that's not the reason prices didn't rise in Japan. When Americans and others borrowed Japanese Yen, they didn't just sit on the money. There'd be no point borrowing Yen unless you eventually spend it on something.  In fact the money was used to by all sorts of goodies, which is why Japan had a huge trade surplus with most other countries. Japanese Yen therefore flowed back into Japan, and  the money stock in Japan increased as though the money never left..

The only way that Yen wouldn't flow back into Japan would be if international debts between non-Japanese individuals and corporations were being settled in Yen, and large cash positions were continually held outside the country. While this certainly happened, it was not as significant as the money flowing back in, as evidenced by the trade surplus.

The bottom line is that from 1990 to 2008, the combined demand deposits of Japanese individuals and corporations at domestically chartered and Shinkin banks, plus the total amount of currency, increased by about 170%.  The reason prices didn't rise was an increased demand to hold cash.

 

 

 

 

 

 

Just to be clear: 

When I say an increased demand to hold cash, I don't mean an increased demand for bank notes or coins (currency).   I mean an increased reservation demand for money in general, and a corresponding unwillingness to spend. Thus Japanese individuals and corporations saw their demand deposits increase as a result of money printing, but didn't increase their spending correspondingly.