In our first problem, Japan is offered as the example of an economy not suffering from inflation, rather, it was caught in a deflationary trap for the best part of 20yrs.
First and foremost, inflation and deflation are broad measures. They are not confirmed in the narrow measurements. Thus the purchasing power across broad prices need to be looked at.
Thus with a weak Yen, due in large part to the popularity of the Yen Carry trade, the purchasing power of the Yen was severely impacted. For a country that essentially needs to import all raw materials, this would have created an inflation as commodity prices rose across this time period. Thus to claim that government policies [low interest rates, etc] had no effect is simply incorrect.
That the Japanese are a nation of savers, and chose to export their savings due to the very low interest rates domestically, would also have added to currency weakness and decreased purchasing power.
Second, the Japanese Banks did not write down as aggressively [mark-to-market] impaired assets on their Balance Sheets. The bailout money that they received offset their losses and maintained capital ratio’s but did not allow the Banks to return to health until now. This however did keep them out of the American & European markets that has hit US & European Banks. Therefore Japanese Banks were not aggressive lenders to residential or commercial property as they were through the early eighties.
Third, Japan increased their productivity. The Japanese being a nation of savers deferred present value consumption for future value consumption. This future value [intertemporal shift] created an increase in capital in higher order production, which increases production and lowers end consumer prices, or increases purchasing power. This effect led many to bemoan deflation in Japan. This is not a negative, this is a positive, lower prices increase your real income.
This however was reflected within the stockmarket. In an inflation, where the value of your money loses purchasing power over time, then in a manufacturing industry your costs incurred are higher in real terms than your Revenues, thus reducing your real profits.
Consumers therefore reaped the benefits of an inflation, while the capitalists suffered and explains why the Japanese stockmarket has essentially stagnated for the duration of the government efforts to create [successfully] an inflation.
