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Japan's economy has barely grown in nominal terms after two "lost decades", and is again suffering from deflation.
The euro area's inflation is running at 2.5%; when the BoJ raised interest rates in 2000, Japan was suffering from deflation (it still is).
Once price-setters and wage-bargainers believe that the central bank means business, monetary policy gains extra clout.In principle, the same trick should work if the economy is suffering from deflation rather than high inflation.
In other words, both central banks were admitting that inflation can be too low.Japan has been suffering from deflation (a fall in the general price level) since the mid-1990s, but now there are fears that the disease could spread to America and Europe.
In the year to January, industrial production surged by 11.4%, the highest in three years.In China, which has been suffering from deflation, consumer prices rose by 0.4% in the 12 months to January.In this section Overview South Korea Economy Financial markets Reprints.
Equally, in an economy undergoing profound structural change and suffering from deflation, it is a particularly daunting task to know how much of a change in spending is due to a change in real output, as opposed to a change in prices.This is why the only sensible measure of Japan's economic performance is nominal GDP, ie, total national output measured in money not volume terms.
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As recently as last October, China was still suffering from gradual deflation at the producer level.
A decade ago, Japan was a byword for failed economic policies: years after its real estate bubble burst, it was still suffering from chronic deflation and slow growth.
Even before SARS, however, Hong Kong was suffering from severe deflation, and Mr. Leung predicted today that because of SARS, the general price level here will drop 2.5percentthis yearar, instead of the 1.5percentt previously forecast by the government.
It allowed the BoJ to pursue a policy that was relatively safe involving a metric (ending deflation) with which people were comfortable, it gave the BoJ the ability to say it was trying extraordinary things, and yet it spared them having to try something controversial which might nonetheless have proven far more effective.By the late 1990s, Japan was suffering from persistent deflation.
It might do that, or fiscal policy might be forced into action, if the economy really were suffering from accelerating deflation; but instead all you see is low inflation, which might even lead some central bankers to declare that they were doing their job just fine.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com