The Japanese have discovered, or so they think, the secret to ending economic deflation — a condition that is now entering its third decade in Japan.
Their so-called solution is to simply flood the market with newly printed money.
According to Keynesian theory, the reason that Japanese consumers (and any other worldwide shoppers for that matter) are not spending is because of a lack of money and/or credit (the real definition of deflation.)
So, the obvious reason (secret) is to do what the U.S. is currently doing, namely quantitative easing. Of course, they give it a catchy name like “monetary strategy.”
While I could write paragraphs and provide an in-depth analysis of both the positives and the negatives of such monetary policy, perhaps a very straightforward story would better serve the purpose: On a beautiful sunny day in Tokyo, Madame strolled into a furniture store hoping to purchase a brand new couch, and she quickly spotted something that met her approval. Unlike the average U.S. consumer, she had diligently saved money for this purchase, yet Madame also had plenty of credit with an assortment of unused credit cards. She was then approached by an aggressive salesman whose job was on the line if he did not complete the sale.
Therefore, the salesman utilized all his wily ways in order to persuade Madame to buy immediately, including offering as much as a 20% discount.
It was the perfect couch with a discounted price and the cash was in hand, thus Madame said, “Let’s do the deal.” (Of course, it was stated in much more eloquent Japanese.)
While the salesman was completing the necessary paperwork, another shopper who just happened to be Madame’s acquaintance, warmly greeted Madame by saying, “I heard through the grapevine that in three weeks this store will be having a surprise 50%-off sale that even the store employees don’t know about.”
Madame promptly replied, “Thanks dear, then I’ll wait and make my purchase at a later date,” as both customers immediately marched out of the store anticipating much lower prices in the near future.
When the salesman returned with the completed documents in hand and thinking that he had secured his job for at least another day, he unfortunately found his customer to be long gone and realized that his days as a furniture salesman were over. Yes, we economists can give all sorts of reasons for lack of demand.
We both, Keynesians and Austrians, can also give solutions based upon economic models and historical precedence, respectively. Yet, quite simply, if the consumer believes that discretionary goods will be less expensive tomorrow than they are today, they will delay the purchase.
Consequently, inventories increase, production ceases, wages are reduced, and employees are ultimately downsized, all due to the vicious deflationary cycle. Indeed, the central bankers of the world are absolutely terrified of the old axiom, why buy retail when you can get it wholesale — tomorrow.