Japan: Election Issues, December 16

Deflation continues to plague the Japanese economy.  In real terms,  GDP declined at a seasonally adjusted annual rate of 3.5% in the third quarter.  In nominal terms the decline was 3.9%. When the price level declines, real increases in GDP are less than those in nominal terms and decreases in real terms  are greater than the nominal as can be seen in the attached chart.  In almost every quarter during the last ten years, an increase in real GDP was larger than the increase in nominal GDP and a decline in real GDP was smaller than the decline in the nominal GDP.   Attempts to combat deflation have been tried and failed.  It is bound to be an important issue in the upcoming election on December16th.

Shinzo Abe of The Liberal Democratic Party (LPD) is making it the central issue.  He is advocating a much more aggressive monetary policy than that of the current administration and is proposing an inflation target of 2 to 3%.  The current Prime Minister, Yoshihiko Noda, has advocated more moderate increases in monetary policy and a 1% inflation target.  He is concerned that a more aggressive monetary policy might weaken confidence in the currency; and in the long term solvency of the country which has a debt to GDP ratio of over 230 to 1, as shown in the second chart.

A weaker yen, however, would be positive where exports are concerned. The yen has recently weakened.  It is currently 81.29 compared with 77.58 on September 28, as can be seen in the third chart.