Why Are Prices Falling in Japan Amid Global Inflation?

The escalating debt crisis in the United States has become an increasingly worrying specter as the nation grapples with a staggering $28 trillion in debt. This massive figure looms over the American economy, putting the country's reputation in a precarious position, especially with an impending deadline of October 18. If the U.S. fails to devise a viable solution to this enormous debt, the repercussions could lead to a collapse of national credibility, exposing the vulnerabilities within a seemingly strong external facade.

Faced with this disconcerting reality, the crucial question arises: what innovative strategies might the United States concoct to rescue itself from this staggering financial quagmire?

One strategy, albeit without much success, has revolved around the notion of simply printing more money. Going back to last year, the administration thought it had discovered a "solution" by engaging in extensive monetary expansion, infamously dubbed "money printing." The logic followed by policymakers was straightforward: since the debts are denominated in U.S. dollars, why not just generate more dollars to pay them off?

Advertisement

The potential drawbacks of this approach, including inflation and currency devaluation, seemed like secondary concerns to a government desperate to put out financial fires. For them, the immediate goal was survival, as failure to make timely payments would have catastrophic consequences.

Earlier this year, there have been concerted efforts to stimulate the economy, which included introducing a $1.9 trillion economic stimulus package. Officials anticipated that this injection of funds would stimulate various sectors, enabling a resurgence in economic activity and prompting a beneficial multiplier effect—a sort of financial lifeblood that could cure the afflictions of the economy. However, much to their dismay, this substantial monetary infusion seemed to vanish without a trace, scarcely making a ripple in the economy.

In light of the stagnation that followed, the government was compelled to announce an even larger stimulus of $4 trillion. This second attempt saw somewhat better reception—a few ripples at least—but questions loomed large. Where did these colossal sums of money originate? Were they simply conjured into existence?

Indeed, under the guidance of the government, the Federal Reserve turned on its money-printing machine, effectively generating nearly $6 trillion and flooding it into the market. Over a span of about 68 weeks from July of the previous year until now, this unprecedented monetary easing resulted in a staggering $31 trillion being injected into the economy.

This amount, interestingly enough, equals almost exactly the outstanding $28 trillion in U.S. debt—leaving a little extra to cover other expenses. However, one must ponder the legitimacy of this method. Is it truly sustainable or prudent?

The U.S.’s money supply growth rate has never been so rapid; recently, some banks noted that the pace has surpassed levels not seen since 1913. But to understand the significance of this, it is crucial to reflect on the backdrop of that time. The U.S. was riding high on the second industrial revolution, with advancements in aviation, internal combustion engines, and electrical applications. This boom gave the country substantial leverage to print more money and service a burgeoning domestic market. Fast forward to today, and the scenario drastically differs. What economic backing does the U.S. possess now to support such aggressive expansion of its currency?

Back in 1913, the economy was flourishing, with minimal debt—a sharp contrast to today’s situation where the U.S. Federal Reserve's liabilities have ballooned to over 600%, implying a risky sixfold leverage in pursuit of uncertain outcomes.

The situation has led to the disturbing practice of the U.S. utilizing newly printed money not to settle its debts, but to purchase international bonds—hundreds of billions' worth. One could liken this to a tactical move in a game of "Tai Chi," where risks are deftly deflected to other nations, sharing the gamble of global economics.

This technique enables the U.S. to deflect responsibility if it faces demands for debt repayment. When creditors come knocking, the U.S. can simply assert that its money is "out on loan" to other countries. This intricate dance of debt does bear resemblance to a well-known situation in the realm of finance—commonly referred to as a "triangular debt" within domestic circles. In more intimate financial ecosystems, individuals often find themselves entangled in similar scenarios for several years. Given the complexity of international debt, the situation is magnified exponentially.

Therefore, the U.S. seamlessly intertwining money printing with the delay of debt repayment showcases an adeptly calculated maneuver, raising eyebrows across global economic circles. However, this avalanche of newly created currency inevitably leads to inflation, depreciating the dollar’s value. Just six months ago, in April, the inflation rate surged past 4%, marking the highest increase in twelve years. What previously cost $100 would now set you back $104.

This seemingly insignificant 4% jump carries substantial implications. As costs escalate, the secondary effects of inflation amplify the original price hike further through subsequent stages of the economy. The renowned rise in pork prices last year serves as a parable—initially, the cost of live pigs might have increased by song, but the resultant bacon and pork sausage could soldier on at three times the price.

In the current American landscape, beef prices have doubled—from $6 to $12 per pound. This doubling not only reflects the original cost surge but sparks wider ramifications for the economy. As inflation takes its toll, households find their expenses ballooning while wages remain static, precipitating a shortage of workers as unemployment figures swell. This scenario presents an agonizing dichotomy; one side struggles to find help, while the other struggles to find jobs.

Unfortunately, the consequences of America’s financial experiments extend far beyond its borders; countries worldwide are feeling the reverberations. Take Canada, for instance; the proximity means it bears the brunt of U.S. inflation straight away. This March, consumer prices rose by more than 2% compared to the previous year. The UK has not remained untouched, either, witnessing similar increases—particularly in clothing—with some items seeing prices surge by nearly 1.5 times since last year.

European nations trail closely behind, joining the ranks of inflation-ridden economies. As such, the question arises: how can one mitigate inflation? To tackle inflation effectively, it is fundamentally required to identify its root cause. And in this instance, it cleanly points to the U.S. and its reckless printing of dollars.

An interesting solution has sparked conversation—“de-dollarization.” Simply put, countries could distance themselves from U.S. dollars in their economies to stabilize their own inflation rates. Russia, in particular, has taken a decisive step towards this end goal, parting ways with its U.S. Treasury bond holdings and actively offloading dollar-denominated assets.

Russia perceives this transition as an essential move to navigate through the financial storm engulfing the U.S. Ultimately, the need to eschew financial entanglement with America outweighs the potential losses of selling at lower prices. Consequently, the nation is now accumulating reserves in gold and the Chinese yuan, a testament to their desire for security—to move away from a singularly dollar-dominated international trading framework, even mandating transactions between China and Russia in yuan.

Ironically, as the U.S. resorts to monetary policies that exacerbate global inflation, one country, Japan, has remained a stark anomaly. Surprisingly, Japan's prices have not surged alongside the dollar's inflation; in fact, they have continued to decline steadily—evidence of a deeply ingrained deflationary landscape. Current data reveals a declining Consumer Price Index (CPI), with April figures dipping into negative territory.

One must ponder the root causes of Japan's unique situation. The juxtaposition of Japan’s economy against that of the U.S. becomes particularly fascinating, especially since Japan has often been dubbed one of America's staunch allies. Why does it thrive when the U.S. falters?

To comprehend the dynamics at play, one must delve into the broader influences that determine pricing—the interplay of supply and demand. When supply exceeds demand, prices decline, fostering a buyers' market. Conversely, if demand overtakes supply, prices ascend, resulting in a sellers' market. Unfortunately for Japan, consumer demand has waned dramatically, creating an environment where supply outstrips demand, resulting in price reductions.

The sociological shift toward a "low-desire society" among Japanese youth contributes significantly. Economic realities have driven many young people into a position where they can scarcely afford basic necessities, giving rise to a mentality of simply surviving rather than thriving.

Japan's economic troubles trace back to the infamous "Plaza Agreement," which effectively crippled its economy and led to a prolonged period of stagnation. Lacking the flexibility to recover as Germany did after its reunification, Japan faced a relentless ascent in property values and an eventual pop of a colossal economic bubble. Faced with the aftermath, many young individuals adopted a "laid-back" approach to life—surrendering aspirations for homeownership or wealth accumulation, leading to the distinctive demand slump of today.

As businesses scramble to maintain sales within this environment, they often resort to all-out price wars. Japan’s low prices, therefore, aren't merely a function of market competition, but a culmination of diminished consumer desires stemming from a generation's disillusionment with the pursuit of financial success.