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Japan: What deflation? What depression?

There's a lot of unfounded talk going around these days about how deflation has killed the Japanese economy, as good friend Don Luskin pointed out to me the other day. This chart shows the year over year growth in Japan's Nationwide CPI. Since Mar. 1993, Japan's price level hasn't budged: inflation has netted out to zero. That's over 17 years of price stability. From the very peak in Japan's inflation, which was in late 1998, Japan has "suffered" an average annual decline (i.e., deflation) in its price level of 0.4%. It's hard to see how this might be the killer deflation scourge that it's made out to be.

And as for "killer," it turns out that Japan's economy hasn't been killed at all. From the end of 1998 through the first quarter of this year—the period during which the Japanese price level fell 0.4% per year on average—Japan's economy expanded by almost 10%, for an average annualized growth rate of 0.8% per year. By comparison, the U.S. economy grew 25%, or 2.0% per year on average over the same period. The U.S. economy sure trumps the Japanese economy, but not if you consider that our population is younger and has grown at a faster rate than Japan's.

From the end of 1998 to June of this year, Japan's labor force actually shrunk by 3.1%, or about 2 million workers. That means that on a per worker basis, Japanese output expanded by about 13%. By comparison, the U.S. labor force grew by 10.8%, or about 15 million workers over the same period. That translates into a 13% expansion per worker, almost exactly the same as in Japan!

Where Japan has really suffered, of course, is in its stock market. The Nikkei 225 peaked at 39,000 at the end of 1989, and today stands at a mere 9,200, for a decline of almost 75%. The S&P 500, in contrast, has risen over 400% during the same period.

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