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Land of rising prices

April 01, 2006

JAPAN IS BACK. AFTER 15 YEARS in the doldrums, its economy is showing real signs of life. Consumers are spending, the stock market is up and, of most interest to economists, prices are no longer falling. The era of deflation has come to an end, allowing Japan's central bank to stop begging people to borrow money at no cost.

This is good news. A healthy, growing Japan, the world's second-largest economy, benefits the rest of Asia as well as American manufacturers such as Boeing. For too long, American consumers have been carrying a disproportionate load in terms of keeping the global economy on track. Reports that conspicuous consumption is making a comeback in Tokyo are a welcome sign of renewed confidence in the future.

Throughout the 1990s, Japan's economy stumbled. Its growth rate was pathetic -- often negative in real terms. Japan's exuberance in the 1980s (which scared Americans before we started obsessing about China) turned out to be a bubble, one whose popping took more than a decade to overcome.

Deflation plagued Japan's economy for years with tumbling prices, which crippled wages and corporate income and made debt all the more burdensome. Real estate prices fell for 14 years in a row, amounting to a decline of about 60% over that time. The Nikkei index of stock prices fell from an all-time high of 39,000 to below 8,000 before climbing back to about 17,000.

It was downright strange. Japan kept lowering interest rates until they hit zero in 2001. Bond prices fell so low that by 2003, even 30-year government bonds yielded less than 1%. Economic historians made the case that the cost of borrowing money had never been so low -- not in the financial transactions of ancient Greece or Rome or China, or anywhere else in recorded history. And yet zero interest rates remained. For five years. Only now are Japan's bankers talking about possibly lifting rates by a quarter of a percent this summer.

On March 9, Japan's central bank finally ended a half-decade-old policy of pumping excess money into the financial system, a policy known in Japan as "quantitative easing." What enabled it to do so was the rise of consumer prices, up 0.1% in November and again in December and then 0.5% in January. Until the November increase, consumer prices had not risen in two years.

An aging population and a daunting public debt will continue to cloud Japan's long-term prospects. But in the short term, with any luck, American politicians will once again start fretting about the Japanese "miracle" and complaining about the Japanese snatching up such U.S. properties as Rockefeller Center.

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