Home > Analogy, Causes of Inflation, Economy, Japan, Theory > Deflation Isn’t An Export; Crazy Talk Is

Deflation Isn’t An Export; Crazy Talk Is


The question concerns Japan, as so many questions soon will. The statement is made that the aggressive quantitative easing by the Bank of Japan is “exporting deflation”, and is thus the profligate monetary policy of Japan creates the risk of declining inflation domestically.





But where did the money go?



So in short, Japan is “a bug in search of a windshield”: yes. The Bank of Japan’s aggressive QE will cause inflation in Japan: yes. The depreciation of the Yen will “export deflation” to the rest of the world: no. In fact, the BOJ’s action will raise the price level in the rest of the world, although less than it will raise its own price level because the currency move will offset a small part of the liquidity effect.

Now, I am sure that someone will object that this violates Purchasing Power Parity, which suggests that the A-B currency pair should change exactly enough to offset the difference in price-level changes in countries A and B. My two quick observations are: (1) PPP is useful theory but doesn’t seem to describe the real world (see the Wikipedia entry on PPP for some evidence and objections), and (2) if PPP is right, then exporting deflation is also impossible. According to PPP, the BOJ QE would have no effect on our price level…so it’s not a very effective objection to my argument that “exporting deflation” is crazy talk.

  1. June 3, 2013 at 4:21 pm

    I have to admit, the idea of exporting deflation is so far fetched that I simply ignored the several articles that mentioned the idea as simply wrong-headed. As I think it through more thoroughly, it seems that deflation would come about from a reduction in money supply, not an increase in money supply. Or at least a reduction relative to the amount of goods that are produced.
    And it seems disingenuous that pundits were never concerned about the US exporting deflation when it embarked on any of its various QE versions. in fact, if memory serves all the talk was about the US exporting inflation, something that we seem to be seeing in several resource reliant countries like Brazil and South Africa.
    So what is the genesis of the exporting deflation idea?

    • June 3, 2013 at 4:52 pm

      Well, the idea is that Japan is doing QE mainly to manipulate its currency, which helps exports. I don’t believe that, but people who don’t think QE causes inflation can’t conceive of any other reason they might be doing it. 🙂

    • June 3, 2013 at 4:53 pm

      PS…thanks for this post. Whenever I write about currencies I am delighted when the fxpoet chimes in and tells me I am not crazy. Long live the fxpoet!

  1. June 4, 2013 at 6:49 am

Leave a Reply


WordPress.com Logo


Twitter picture


Facebook photo


Google+ photo


Connecting to %s

%d bloggers like this: