Japan project 3

                

             The evolution of inflation,  π(t), and unemployment,  UE(t), in Japan has been modeled. Both variables were represented as linear functions of the change rate of labor force, dLF/LF. These models provide an accurate description of disinflation in the 1990s and a deflationary period in the 2000s.  

             

       In Japan, there exists a statistically reliable (R^2=0.68) Phillips curve, which is characterized by a negative relation between inflation and unemployment and their synchronous evolution:  UE(t) = -0.94π(t) + 0.045. Effectively, growing unemployment has resulted in decreasing inflation since 1982.  

              

             A linear and lagged generalized relationship between inflation, unemployment and labor force has been also obtained for Japan: π(t) = 2.8*dLF(t)/LF(t) + 0.9*UE(t)  - 0.0392.  Labor force projections allow a prediction of inflation and unemployment in Japan: CPI inflation will be negative (between -0.5% and -1% per year) during the next 40 years.  Unemployment will increase from ~4.0% in 2010 to 5.3% in 2050.    

    

           The figure below shows a scatter plot for unemployment (NAC) and CPI inflation in Japan. A linear regression gives a negative slope of -0.94 and constant tern 0.041 for the period between 1982 and 2006. This regression has been calculated with various time shifts between the unemployment and inflation time series.  The best fit (R^2=0.68) was obtained in the case wen the unemployment curve and the inflation curve are not shifted. Before 1982, there is no linear relation between unemployment and inflation where the CPI inflation curve is modified according to the results of the linear regression. 

                Inflation/unemployment scatter plot and linear regression for the period between 1982

and 2006. Neighboring years are connected by a curve. This curve represents the Phillips curve for Japan. R2=0.68. Regression coefficients are -0.94 and 0.041. Therefore, increasing inflationleads to decreasing unemployment and vice versa. Similar link between inflation and

unemployment is observed in Germany.

  

Japan-- inflation

           The inflation rate in Japan was recorded at -0.10 percent in December of 2012.   Historically, from 1958 until 2012, Japan Inflation Rate averaged 3.04 Percent reaching an all time high of 25 Percent in February of 1974 and a record low of -2.52 Percent in October of 2009. In Japan, the most important categories in the consumer price index are Food (25 percent of total weight) and Housing (21 percent). Transportation and communications accounts for 14 percent; Culture and recreation for 11.5 percent; Fuel, light and water charges for 7 percent; Medical care for 4.3 percent; Clothes and footwear for 4 percent. Furniture and household utensils, Education and Miscellaneous goods and services account for the remaining.

 

           According to the chart below, Japan's inflation rate as measured by the consumer price index was generally meandering around the zero percent level.

          In 1990 a stock market bubble burst in Japan. Two years later an even larger real estate bubble burst. The economy was hit by a recession. Huge monetary and fiscal stimuli were implemented, and government indebtedness went through the roof, rising from 60 percent of GDP to as high as 200 percent, where it stands now.

 

      Despite all the money printing and government stimulus going on in Japan for many years, there hasn’t been inflation until now, that is. In general, there are two reasons for Japanese price stability. First, a very high savings rate combined with strong patriotism enabled Japan to internally finance the steeply rising government indebtedness. And, second, domestic private and institutional investors bought nearly all government debt issued during these past 15 years. Hence Japan did not have to compete internationally to raise capital, thus interest rates not only stayed low but fell ever lower.

      

      In 2013, Japan signals a new strategy to boost economy with a 2% inflation target. The goal is to shake the world’s third-largest economy from two of its most unrelenting problems, chronic deflation and a strong currency, which hurts Japan’s exporters by making their products more expensive overseas. But the strategy represents a particular gamble for a nation already with the highest debt burden in the developed world, at 220 percent of the gross domestic product.