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Deflation: Kuroda’s Captain Hook?

Low and stable inflation is not normal.

For only one third of the time since 1774 has inflation* in the US been between 0 and 3%. The recent run of 16 years has smashed the previous record of 14 years held by 1957 to 1970, which itself had edged out the 13 years of 1904 to 1916.

The odds of it staying in this nice, Goldilocks range are not great on the basis of history, but which way will it go when it finally breaks? It seems extraordinary that nearly a decade on from the financial crisis we are none the wiser as to the answer.

Financial historian Russell Napier thinks that “six years after the launch of QE we get deflation anyway and a move to government action.” Although in the same presentation he cites Friedman’s quote ‘inflation always and everywhere being a monetary phenomenon’, his point is that “in fiat systems money is created by commercial banks and not by central banks”.

In a world of structurally weak demand for credit, central bank stimulus, it seems, is like ‘pushing on a string’. One man who hopes that Napier is wrong and Friedman is right, is Bank of Japan Governor Haruhiko Kuroda, who has staked his reputation on being able to stir animal spirits in a country used to deflation. He spoke yesterday at a two-day conference on monetary policy, and today’s FT notes that he mentioned Peter Pan as an inspiration. “I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease for ever to be able to do it’,” he said. With government forecasts for the Japanese population to fall by one third by 2060, Mr Kuroda has a major job on his hands keeping the doubters at bay.

* 10 year, annualised

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