Japan Deflation

Introduction

Referred to as the Lost Decade (or the Lost 10 Years), the prolonged deflation of the Japanese economy is one of the worst the world has ever witnessed. Beginning primarily in late 1991 and early 1992, it originally spanned from 1991 to 2000 but the deflationary effects on the Japanese economy was strongly and clearly persistent even in the period of 2001 to 2010. As such economists refer to this whole period of economic devastation as the Lost Score (or the Lost 20 years). Japan is still reeling from its devastating effects.

1. What was the intensity of the deflation? How long did it stay?

Ans:

For measuring the intensity of the deflation, we have considered three economic parameters ad based our study on these parameters. The parameters are as follows:

• GDP Deflator

• Wholesale Price Index (WPI)

• Consumer Price Index (CPI)

GDP Deflator: Also termed as “implicit price deflator”, it is a measure of the price levels of all new, domestically produced, final goods and services in an economy. Mathematically, it is given by:

GDP Deflator = (Nominal GDP * 100)/Real GDP

This formula implies that in case GDP Deflator is positive, Nominal GDP is higher than Real GDP. This leads to increase of prices of all the goods and services in the economy ultimately resulting in inflation.

In case GDP Deflator is below 0 i.e. negative, the overall prices of goods and services falls leading to deflation in an economy.

Fig. 1: GDP Deflator trend of Japan in the 1990s

In the above graph, the points where the graph is dipping below 0 signifies a dip in overall prices in the economy leading to deflation in those periods.

Fig. 2: Japan’s GDP Gap and Inflation Rate

GDP gap= ((Actual GDP-Potential GDP)/Potential GDP))

Inflation rate in terms of consumer price index. The figure clearly describes that during the deflation of 1990’s Japan’s GDP reached up to minus 8 and minus 2.

YEAR GROWTH RATE

1950 1.90%

1960 1.80%

1970 1.00%

1980 0.90%

1990 0.00%

2000 -0.6%