Japan and deflation

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    SO many of my friends always point to Japan as being the example of what happens when people save too much and don’t spend. They claim this is what happens to a country when it experiences deflation. How can I better understand this issue and be able to give a good Libertarian rebuttal? It is hard to find info on this subject from a non Keynesian perspective. Thanks!


    I get the same argument from people and never have a good rebuttal. Dr Herbener, could you give us the readers digest answer?


    The viability of a production process depends on the spread between output prices and input prices, not on the level of output prices. Deflation means that the purchasing power of money is rising, i.e., all prices are falling. As long as output prices and input prices fall together, production processes can be maintained.

    In Japan, prices have been falling (albeit modestly), throughout the different production processes since the financial collapse in 1989. In fact, the wholesale price index has fallen more than the consumer price index, which is the usual case during price deflation.

    Here’s a chart of the wholesale price index:


    Here’s a chart of the consumer price index:


    You can select the beginning year to make a chart with a comparable time-frame to the wholesale chart.

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