Has Deflation Killed the Japanese Economy?

Conventional wisdom in economics says that deflation is bad because it motivates consumers to put off purchases. Why buy now when the same item will cost less a year from now? Dean Baker isn’t so sure:

Japan’s rate of deflation has only exceeded 1.0 percent in 2009. With a rate of deflation of 1.0 percent, a $20,000 car would sell for $100 less if buyers waited six months. It is unlikely that many consumers will make that decision. In this respect, it is worth noting that computer prices have fallen at double digit annual rates for most of the last four decades. This has not impaired sales in the computer industry in any obvious way.

Not only is this true about computers, it’s famously true. People even complain about it. And yet we all keep buying computers by the truckload.

That said, deflation makes the zero-lower-bound problem even worse. How does a central bank stimulate the economy when a 0 percent interest rate is not merely an inadequate stimulus, but a negative one? For this reason, it’s probably best to keep the inflation rate positive regardless of whether it has an effect on consumer spending.

Baker’s larger point, by the way, is that Japan’s economy over the past couple of decades has basically been fine. He’s right.


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