Japan’s Deflation Debacle

January 4, 2014

By Connor Ross

In North American today, consumers are constantly dealing with the rising prices of goods in all sectors – a phenomenon known as inflation. Inflation has been prevalent in North America for generations, and has only seen deflation in 1 of the previous 50 years. A low but steady rate of inflation is important for a nation to grow and develop, as it allows banks to better adjust the real interest rates to a desired level, mitigating the risk of a recession.

However, across the Pacific Ocean in Japan, they are seeing the exact opposite. Constant deflation has been seen over the entirety of the last 15 years, one of very few developed countries currently seeing these types of conditions. What this means for Japan is that they have seen declining corporate profits, as well as declining tax revenue during this time. In an age where the rest of the world is becoming more expensive, Japan’s deflation has left them in a very peculiar position.

In order to grow and change along the same rate as other developing countries, the Bank of Japan (Japan’s central bank) has dedicated themselves to raising the inflation rate to 2% by 2015. They intend to do so by dramatically loosening its monetary policy, which in turn is going to make foreign central banks less aggressive towards the Japanese, and should thus outperform the Yen. The flip side of the weak Yen in Japan is that it has made Japan’s exports more competitive globally, vastly benefiting some of Japan’s largest companies like Toyota and Samsung. The Prime Minister of Japan, Shinzo Abe, is urging companies like Toyota to pass these increased earnings onto their employees, as wage increases are a good stimulus for raising inflation, as people would become willing to spend the extra dollars they received.

As Japan attempts to sort its monetary woes out from within, there are benefits to be had by other nations, corporations and individuals worldwide. If inflation rises throughout the year as it should, the Yen should go through gradual decline as the purchasing power lowers as inflation rises. This means that most of the G10’s currency exchange rates with Japan should be very favourable in the coming year, allowing for governments, corporations and even the individual investor to benefit. Shorting the currency is as close to a sure thing as it gets, as the government itself has already stated that it will keep lowering the value through monetary policy to get itself to the desired rate of inflation.

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