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Japan Continues to Slide Down the Deflationary Slope

October 30th, 2010

The Japanese economy never did recover from the implosion of its banking sector in the 1990s. Tokyo decided to artificially maintain its banks on life support, precipitating the country’s notorious L shaped recession. Now that the  global economic crisis has done its share of damage to Japan’s export machine, Japan looks to endure a second miserable decade of economic recession and stagnation.

The latest economic indicators out of Tokyo show manufacturing output having declined  nearly 2 percent in September, the 4th straight month of industrial decline. More worrisome, the figures also show the Japanese economy experiencing its 19th consecutive month of  declines in core consumer prices. As all economists are aware, deflation is a dragging on the consumer sector of the economy, inhibiting individual consumers from executing major purchases. This explains the weak domestic demand in Japan, and with a rising yen threatening exports, it is no surprise that the prognosis for the Japanese economy is very grim.

As the United States has largely replicated Japan’s strategy in the 1990s of propping up insolvent banks at all costs,  it may be that what the Japanese economy is enduring is also a harbinger of the long-term economic path for the United States.

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