This month's featured article
Japan's Deflation Problem and Prescription <RIETI Featured Fellow> UESUGI Iichiro
UESUGI IichiroConsulting Fellow, RIETI
Greetings from RIETI
Tokyo Disneyland celebrated its 20th anniversary last week. The total number of visitors to TDL and Tokyo Disneysea exceed 300 million. Indeed, it is always horribly crowded. In Japan, many theme parks are closed down, and TDL is in the position of the sole winner. But even TDL is suffering from the decrease in the amount of money that each visitor spends there, given Japan's deflation problem. RIETI Report features Japan's deflation problem and possible prescriptions. We interviewed fellow Iichiro Uesugi on this topic.
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Dr. Uesugi has been a fellow at RIETI since 2002. After he received a B.A. in economics from the University of Tokyo, he joined MITI, and in 2000, he received his Ph.D., in economics from University of California, San Diego. His expertise is financial policy, financial market, and macro-economics. He is currently working on the movements the short-term money market, which deals with overnight call rates controlled by the central bank by providing and absorbing short-term funds to and fromdepositing institutions. His selected publications and papers include "Measuring the Liquidity Effect: The Case of Japan", Journal of the Japanese and International Economies, Vol. 16, No. 3, Sep 2002.
RIETI Report: Concerning Japan's deflation, some people say that falling prices are good for consumers, while others say that an increase in real debt burden will bring a negative impact on economy. In your view, what are the causes of the ongoing deflation and what impact it will have on the Japanese economy?
Uesugi: A series of factors are causing deflation in Japan, bringing negative effects to the whole economy. At the same time, the deterioration of economy leads to the further aggravation of deflation, thus, creating a vicious cycle. The problem of aging and decreasing population is surely a big challenge for Japan but such long-term issues are not necessarily relevant to deflation. I believe the deflation problem that we have today is not a structural problem.
A demand-supply gap is the largest factor behind the deflation. One of the grounds for this view is that figures provided as measurement of actual output relative to potential move very much in parallel with inflation rates. Debates on the cause of deflation tend to become doctrinaire. We need to have more concrete discussions based on detailed analyses. For instance, some people say that the overall price levels should remain unchanged even if the prices of personal computers fall because the money saved on the computers would be spent on other items and boost their prices, but such an argument should be reexamined. Concerning this particular question, an interesting study has been conducted, examining price changes for each item included in the consumer price index, and the study results show a significant relationship between a major fall in the prices of certain items and the level of overall prices.
RR: Will additional monetary easing measures by the Bank of Japan (BOJ) be enough to solve the deflation?
Uesugi: The deflation cannot be solved by the BOJ acting alone. There still remains much room for the BOJ and the government to cooperate and coordinate policy measures. In doing so, they must first set a specific goal to achieve though. I believe that closing the demand-supply gap, and not increasing prices, should be the primary objective. Simply put, the government has up until now responded to the demand-supply gap measures with increased expenditures by formulating a supplementary budget with an outlay just enough to fill the gap. But from now on, the government should try to close the gap by increasing efficiency on the supply side and bringing out hidden demand. The government and the BOJ should discuss this possibility and think what each of them can and should do to achieve the goal.
RR: Some people call for implementing measures that have a direct impact on asset prices or having the BOJ finance the funds required by the Deposit Insurance Corp. (DIC) to take necessary actions. What do you think about such proposals?
Uesugi: Following the inauguration of new BOJ Gov. Toshihiko Fukui and two deputy governors, both former bureaucrats, some positive signs are emerging from within the BOJ and it seems that now is the time to take actions. Also, the BOJ's commitment to financing to the DIC would become an important signal to demonstrate its determination to solve the bad loan problem as well as to prevent a significant moral hazard from occurring as a result of avoiding the "payoff" limited deposit protection. But it is uncertain whether the BOJ's signal is enough to move the government. The government must initiate actions (new measures to solve the bad loan problem and/or stabilize the financial system) that would cause DIC's fund demand.
RR: Should the government and the BOJ become ready to cooperate, what would be the next step?
Uesugi: They must start by listing measures to take. First of all, they need to set an overall goal, for instance, boosting the inflation rate from the current negative growth to a positive growth of 1 to 3 percent. Then, they should map out what they need to do to achieve this goal, for instance, spelling out concrete measures to close the demand-supply gap in case of the prior example. Measures to be listed would involve various policy fields, ranging from fiscal and foreign exchange policies to measures related to corporate finance and steps to stabilize long-term interest rates. More details are discussed in my article, " The Government and the Bank of Japan should Formulate a Policy Accordto Pull Japan out of Deflation ", RIETI Policy Debate.
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