Monday, January 26, 2004

The Chinese and Japanese Economies - Inflation/Deflation

The Chinese and Japanese Economies

Inflated Fears, Deflated Hopes
The Chinese fear inflation; the Japanese long for it

WILL the year of the monkey be marked by economic mischief? The Chinese celebrated the lunar new year on Thursday January 22nd, gladdened by the news that the economy grew by 9.1% in 2003. But this heartening performance has stoked fears that the Chinese economy is overheating. It wouldn’t be the first time. During the last year of the monkey, in 1992, China’s then leader, Deng Xiaoping, made his famous tour of the south, urging the country to make the most of its new economic liberties. Liberty soon slid into licence, however, and within a year or two the economy was struggling to cope with rampant over-investment and inflation over 20%.

This year marks an equally troubling anniversary for China’s neighbouring economic giant, Japan. It was ten years ago that the economic superpower fell into a deflationary quagmire from which it has yet to escape. Core consumer prices registered a small increase in October, but fell again in November. The GDP deflator, a broader measure of prices, continues to fall by over 2% a year. While the Chinese authorities are acting smartly to head off inflation, the Japanese authorities are actively seeking it.

Inflation, said Milton Friedman, a Nobel prizewinning economist, is always and everywhere a monetary phenomenon. Maybe so. But Japan has phenomenal amounts of money, and inflation remains always and everywhere elusive. The Bank of Japan is pursuing a policy of “quantitative easing”. It cannot lower the price of money any further—nominal interest rates are already at zero—so it has boosted the quantity of money in the economy instead. Over the past two years, this policy has increased the monetary base by half. On Tuesday, the central bank surprised onlookers by increasing the money supply still further. It now aims to flood the banking system with reserves of ¥30 trillion-35 trillion ($280 billion-330 billion), up from its previous target of ¥27 trillion-32 trillion. ...Continued

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