Japan's Deflation

There are now many references to Japan's deflation, and how it could be an example of what will happen to the US.  If so, what happened in Japan?

Japan's consumer prices didn't fall precipitously.  Over the past 10 years, their core prices have fallen by 6.7% cumulatively.  Until the crisis in 2008, their deflation usually was between 0% and 1% per year.  And the price of some items increased over the long run - notably medical care at 2.1% and petroleum goods at 1.2% over the past 20 years.  Housing/rent increased an average of just under 1% per year.  But the price of durable goods in particular, consistently slid, and has fallen by almost 50% over 20 years.  But if we include everything (including energy and food), the consumer prices have been pretty steady over the past 20 years.  

I don't know why durable good prices in Japan have fallen so steadily.  Maybe the end of import substitution practices.  Or maybe Japanese companies producing more in lower cost China.  Or just lower demand from fearful consumers.  Perhaps not a coincidence, the consumer price of durable goods in the US started falling in the late 1990's - though so far it is only down 15% from the peak.

Whether deflation is the cause or the effect, Japan has gone from first to worst in gross national income per capita among major developed countries.  In fact it is still below mid-1990 levels.

One hope for the US not becoming like Japan is that the US has a growing population, and therefore hopefully a growing economy.  However weaker employment will lead to lower immigration.  And the US birthrate has tracked closely to the overall economy - and dipped in 2009.  As you can see below, Japan's labor force (employed, or just wanting to be employed) has only increased by 2% over the past decade, while the US has increased by 8%.  However the US labor force stopped growing over the past couple of years - a sign of potential workers giving up.

All said, I don't know what it means.  But if deflation does occur, it will probably be a whimper rather than a bang.

Comments

[Duo]

I am puzzled by the world's reaction to Japan's economic problems. Yes, deflation drives up labor cost, Yen appreciation lowers exports, and an aging/decreasing population is sin to growth ... But Janpan's economy started to fall at a very high level. In the past 20 years, the standard of living in Japan has decreased but still way up there. In fact, I read that pensioners in general are happy with the deflation. The media talks about Japan as if it is the end of the world.