The has been a great deal of discussion recently about whether the United States is headed for inflation or deflation. The are plenty of good arguments on both sides of the question. But whether we will have inflation or deflation is not the subject of this article.
Japan’s Two Decades of Deflation
Whenever the subject of deflation comes up, inevitably Japan is mentioned. The Japanese economy has been in a malaise since about year 1989 when their stock market and real estate bubbles popped. And since about 1992, the Japanese have had periodic bouts of deflation. So the parallel to the U.S. is obvious. Can we learn anything from the Japanese experience in a post-bubble economy?
So what was Japan’s actual experience with regard to consumer prices? Is everything now much cheaper in Japan than it was 20 years ago? I wanted to find out, so I decided to take a look at Japan Consumer Price Index, which I will call CPI-Japan.
Japan’s Historical Consumer Price Index
The website rateinflation.com has monthly and annual CPI data for the United States, Canada, Australia, the United Kingdom and Japan. Here’s a link to the data on Japan’s CPI page Japan - Consumer Price Index (CPI) History Japan’s data is available from 1970 to 2010. I plotted the January CPI-Japan in Chart 1.
Chart 1. January CPI-Japan from 1970-2010
Click here for data in table form.
As you can see from the chart, Japan, like the U.S., experienced generally rising prices from 1970 to 1992. But since 1992 until 2010, prices have neither risen nor fallen. They have hovered around 100.
In May-1992 CPI-Japan was 99.4 and has has stayed within a range between 97.8 and 104.1 for the past 18 years.The most recent value for May-2010 is 99.7.
The next chart shows the inflation rate in Japan from 1971 until 2010.
Chart 1. Japan’s Year-over-Year Inflation Rate from 1971-2010
Click here for data in table form.
In the mid-1970s, Japan experienced high inflation just like the U.S. But since the mid 1990’s, inflation has been negligible. There has been alternate periods of low inflation and low deflation.
Stable Prices, Not Long-term Deflation
So Japan has not experienced long term deflation as some editorialists would lead you to believe. That myth is busted. What they did experienced is stable prices for nearly 20 years. This is remarkable for a developed economy in the modern world of Central Banks and fiat currencies.
What About Japanese GDP?
But price level is only part of the economic story. What about output? What about employment? And what about their living standard? Did it improve over time?
As measured by Gross Domestic Product, Japan is the second largest economy in the world after the U.S. So how did GDP fare during this long period of stable prices?
The website indexmundi.com provides economic data and charts for many countries of the world. Unfortunately it only covers 2000 to 2009. But that is probably enough to see how Japan fared during this period of price stability.
The next two charts present Japan’s Gross Domestic Product from 2000-2009. This first chart show Japan’s GDP, in billions of U.S. Dollars Per Year. During the past decade GDP grew from $2.9 trillion to $4.2 trillion. Not too shabby! This second chart shows GDP real growth rate. There were a few negative years, but mostly years with 2+ percent real growth.
The next chart shows Japan’s unemployment rate. Unemployment was about 4 to 6 percent during the past decade. That can probably be considered close to full employment.
Japan’s Shrinking Population
But is Japan’s GDP growth enough to keep up with their population growth? Most modern economies need real growth just to keep up with an increasing population. Otherwise, capita income will decrease and people will get poorer, on average.
Well the next chart shows that Japan’s population has been fairly stable. In fact, the population has been shrinking since 2006. Japan has an aging population and does not allow much immigration of foreigners, what they call Gaijin.
The chart shows population in Japan peaking in 2006 with 127.464 million. 2009 was slightly less with 127.079 million, a loss of 0.3% of their population. By contrast, the U.S. population grows at just under 1% per year, largely due to immigration.
The final chart shows GDP per capita (PPP) in U.S. dollars. It went from $23,400 per person in 2000 to $33,400 per person in 2009. Considering that prices were stable during this time, this implies that people’s living standard increased by 42% over the decade. Not too shabby.
Judgement on Japan’s Economy
From this data, it looks like Japan’s economy and citizens fared pretty well during the past decade. Stable prices, low unemployment, moderate GDP growth and increased living standard for it’s people. If the U.S. economy were to perform similarly during so-called deflationary times, we would be doing very well.
