Saturday, 16 March 2013

Japan, Yet Another Interesting Case

A recent post by Noah Smith about the recent economic policies and performance of Japan showed some interesting statistics, especially on the existence of deflation despite large depreciation of the Japanese Yen.

The depreciation of the Yen to USD is shown on Noah Smith’s post (courtesy to Noah Smith):

In addition to that, the trade weighted index of the Japanese Yen has also fallen drastically show means that Yen have also depreciated sharply against other currencies (Source:

Although a depreciation of currency leading to price raises in imported goods is not the only cause of inflation. Generally, an open economy will face inflationary pressures when there is depreciation of currency. Such as that we can see in Australia’s case:

Inflation Rate, Australia (Source:

Trade Weighted Index, Australia (Source:

Notice the spike of inflation rate from 2000 – 2001 and mid-late 2008 during the GFC? The data range from 2000 – 2001 needs to be read with care as during that period, a 10% Goods and Services Tax is implemented which by itself puts inflationary pressure on the economy. However, the inflation rate spike in mid-late 2008 to 2009 is mainly due to the depreciation of the Australian Dollar. The effect of the depreciation on the price of import can be found by looking at the Import Price Index (Source:

IMPORT PRICE INDEX: all groups, Quarterly % change

The Import of Goods and Services as a % of GDP averaged at 15% for Japan for the period 2008 - 2011, while the average is 21% for Australia during the same period (Source: World Bank). While Japan’s import of goods and service as a % of GDP fluctuates more and is relatively lower as a proportion of GDP; the magnitude of the depreciation for the Yen should nevertheless put some inflationary pressure on the Japanese economy. As the import price index has also risen in Japan (Source:

 However Japan faced a deflation form June 2012 to January 2013 (Source:

The few possible reasons that could cause this are:
1.       The deflationary pressure was so large that it shadowed the inflationary pressure from the depreciation of the Yen (the price of domestic goods and services fallen sharply which shadowed the price rise of imported goods and services); and/or;
2.       Import of goods and services are not counted in the CPI of Japan; and/or;
3.       The rise in the price of import has not yet affected the price of domestic goods and services (statistical lag); and/or;
4.       The price of domestic goods and services are relatively unaffected by the price rise in import.
There can be a combination of the above listed reasons and I'm unsure about the second possible reason. With regarding to the fourth possible reason, here are the major imports of goods and services for both Australia and Japan (Note: I was unable to obtain detailed statistics of major imports of Japan and the source is wiki answers, so there could be mistakes and I’d greatly appreciate if anyone can provide links to Japan’s import in detail statistics):

·         Australia’s Major Imports 2008-2011 (Source:
·         Japan’s Major Imports (Source:

While the import of goods and services vary between the two countries, it is unlikely Japan’s import will have little or no impact on domestic goods and service. If the answer is the third reason (although there can be many other unlisted reasons), the data over the next few months should show an increase in inflation rate. I’ll keep an eye on Japan’s data over the next few months and it could be another interesting case to look at if there is still no visible rise on the inflation rate of Japan over the next few months.

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