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Deflation Returns To Japan, Government Spending Black Hole Madness In U.S.

Economics / Deflation Nov 22, 2009 - 05:25 AM GMT

By: Mike_Shedlock

Economics

Best Financial Markets Analysis ArticleJapan has been hopping in and out of deflation for decades. Japan is back in deflation once again. The Wall Street Journal is reporting Deflation's Return Weighs on Japan


The Bank of Japan faces mounting pressure to loosen its policy as deflation tightens its grip on the nation's economy, even as some other central banks begin to roll back stimulus steps amid signs of economic recovery.

The Japanese central bank on Friday kept rates unchanged and upgraded its assessment of the economy, citing rising exports and industrial output. The bank, which has stuck with super-easy monetary policy for more than a decade, has hoped to follow other central banks in looking at ways to tighten policy. Instead, Japan's government and economists are urging it to adopt new easing steps, such as purchasing long-term government bonds.

The calls grew louder Friday after the government declared that the nation's economy was in deflation -- a decline in the general level of prices for goods and services -- for the first time since 2006. That year, policy makers concluded the nation had finally shaken off the deflation that had hindered its economy since the late 1990s. The heightened pressure for easing also follows a spate of recent data showing accelerating price declines in broad parts of the economy.

"Deflation is getting very severe," said financial services minister Shizuka Kamei. "We are closely watching what the BOJ can do in this environment."

During the third quarter, the domestic demand deflator -- a measure of changes in prices of goods and services except for exports and imports -- fell 2.6%, its fastest pace since 1958.

"It's very important for the BOJ to show the market it has the will to conquer deflation, both through action and through words," Mr. Shirakawa, of Credit Suisse, said. "Otherwise, expectations for deflation will only get worse."

Pure Insanity

Japan has interest rates at 0% and cries scream for more easing. Japan has debt of 200% of GDP in a ridiculous fight against deflation and Mr. Shirakawa, of Credit Suisse wants Japan to "show the market it has the will to conquer deflation".

When does the insanity stop?

Meanwhile back in the US....

Costco drops Coke products in showdown over prices

Inquiring minds are noting Costco drops Coke products in showdown over prices

Costco customers may have to look elsewhere for Coca-Cola products now that the retailer has stopped carrying them because the pair are fighting over prices.

The public squabble between one of the nation's largest wholesale club operators and the world's largest soft drink maker is likely to fizzle quickly. But it reveals real tensions as retailers and product makers square off on prices.

As shoppers continue to grapple with the recession, retailers want to win their favor by giving them low prices. But that has been creating tension between product makers like Coca-Cola (KO), who are working hard to maintain profit margins while meeting retailer demands.

"Beneath this surface of harmony, it's a dogfight out there," Gerry Khermouch, editor of Beverage Business Insights, said Tuesday at an investor meeting held by the soft drink maker at its hometown of Atlanta.

"Costco is committed to carrying name brand merchandise at the best possible prices. At this time, Coca-Cola has not provided Costco with competitive pricing so that we may pass along the value our members deserve," said a message on the company's website labeled "Price Alert!"

Core deflation in the US continues to gather pace

Ambrose Evans-Pritchard reports Core deflation in the US continues to gather pace

Core inflation for factory goods in the US fell to minus 0.6pc in October from a year earlier, edging the country closer towards Japanese-style deflation despite massive monetary stimulus.

Janet Yellen, the head of the San Francisco Fed, said emergency measures had prevented the US economy from sliding into a “black hole of deflation”, insisting that it is still far too early to talk of tightening policy.

A combination of “enormous slack in the economy” and fading fiscal support raised the risk that prices could fall below the Fed’s safe level. “It seems probable that core inflation will move even lower over the next few years,” she said.

While the Fed appears split over its exit strategy, even arch-hawk Richard Fisher of the Dallas Fed said the sheer scale of excess plant will curb prices and wages for a long time. Capacity use in manufacturing is near a post-war low of 67.6pc.

Mr. Fisher said the “peak impact” of the Obama fiscal blitz has already come and gone.

The M3 money supply has been shrinking at a 7pc annualised rate since June. Paul Ashworth from Capital Economics said it is not yet clear whether this is the harbinger of a crunch next year, or a blip caused by portfolio shifts. “We think deflation is still a bigger risk than runaway inflation,” he said.

Black Hole Madness

The black hole is not deflation. The black hole is fighting it like Japan did, or as the US is doing now. For the $trillions spent fighting this mess, all we have to show for it is a lousy bump in GDP at an annualized rate of 2.5%. Now, Fisher suggests (and rightfully so), that's all there is.

Meanwhile all the consumer debt and housing debt is still intact. Moreover, another turn down in commercial real estate and residential real estate is coming. To top it off unemployment is 10.2% and rising, likely headed far North of 11%.

Given that the US is essentially following the same idiotic path as Japan, there is every reason to believe the problem manifests itself in a similar fashion.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

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