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Rising Oil Prices: Not Exactly Good News for Japan’s Economy
Are higher oil prices good for Japan’s economy? No

Rising Oil Prices: Not Exactly Good News for Japan’s Economy

Are higher oil prices good for Japan’s economy? No

Are higher oil prices good for Japan’s economy? No, they’re not.

Yet some commentators believe that surging commodities costs might make Japan’s persistent deflation simply go away.

“Japan could do with a little inflation. At home at least,” James Simms wrote in a recent online column for The Wall Street Journal. Noting that prices for Japanese imports jumped 4.7 percent in January over last year, he added, “Not everyone’s groaning over the rise in commodities prices. Mining equipment makers such as Hitachi Construction Machinery will benefit from sales as commodity exporters rush to increase production while prices are high.”

Unfortunately, the idea that rising commodity prices might be a boon to Japan is based on a misunderstanding of some key economic principles.

Let’s start by answering this question: Why does deflation, or a general decrease in the prices of goods and services, have a depressive effect on the economy? First, deflation reduces incomes, yet debt stays the same, so it worsens balance sheet problems and reduces spending by businesses and individuals. Two, the expectation of future deflation means that any borrowing done now will have to be repaid out of smaller wages (if the borrower is a household) or smaller profits (if the borrower is a firm) later on. Thus the expectation of future deflation also reduces spending.

So, does a rise in food and energy prices do anything to alleviate these problems? No. In fact, it makes them worse by reducing purchasing power. As I have pointed out in the past, Japan suffers from inadequate consumer demand, and this one of the main reasons its economy faces persistent deflation.

In a way, Japan’s situation illustrates the need for economists, in public discourse, to differentiate between inflation measures — core inflation (which excludes things that are subject to volatile price fluctuations) and headline inflation (which doesn’t exclude anything). While the global commodity surge may temporarily lead to rising headline prices in Japan, as it is now, the underlying deflation problem won’t be affected at all.

This debate is related, but not exactly similar to, the usual case I make for the need to focus on core inflation. I have suggested this with regard to European Central Bank, which often switches between inflation measures, using whichever one currently makes the best case for tighter policy.

In this case, my point is that looking at only one chosen inflation rate is a bad guide for policy.

Backstory: Volatile Predictions

By Suzanne Lorge

Will Japan’s economy, which has been experiencing deflation for the past two decades, strengthen now that commodities prices are on the rise worldwide, or will it continue to stagnate? That question is at the core of a debate raging among investors and economists.

Recent economic reports show that deflation in Japan slowed slightly in January, but analysts point out that when volatile food and fuel prices are removed from the calculations, annualized consumer prices actually fell 0.6 percent.

But others predict that the inflation problem that is currently proving so troublesome for countries like China, one of Japan’s main trading partners, will push up prices on goods and services in Japan, thus increasing prices for exports and helping to boost its economy.

However, prices would have to rise across the board. A spike only in commodities prices would be bad news for the Japanese, who rely mostly on imported oil.

The price of oil hit $100 per barrel in the first week of March, an increase brought on by political unrest in Libya and other nations in the Arab world. The last time oil prices spiked to that level, in 2008, the yen fell 7 percent in four months.

Still, many global investors are hopeful about Japan’s prospects. Companies in Japan are well-managed but undervalued, they say, and its stock market presents attractive buying opportunities — though there’s no question that Japan’s stock prices are currently depressed.

“Stock prices are saying there’s no hope whatsoever for Japanese companies, and that’s simply not true,” Tony Roberts, a fund manager for London-based Invesco Perpetual in Japan, told The New York Times on Feb. 21. “There are lots of great companies in Japan that add a lot of value,” he said.

© 2011 The New York Times Company

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007).

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