The Bank of
Japan is struggling to ignite inflation.
“Central bank officials,” reports the Wall Street Journal, “have been putting a brave face on the
slowdown in inflation resulting from the lower oil prices, saying that cheaper
crude will stimulate demand, eventually adding to upward pressure on prices.”
If that
quote is accurate, and if it refers to oil demand, then the Bank of Japan
really is in trouble. It’s confusing a
market equilibrium with the lack of one.
In principle,
the oil market tends toward a price that equates the quantity supplied to the quantity
demanded. If supply exceeds demand, then
sellers will cut their price until they work off the excess. Once they do so – that is, once supply again
equals demand – the price will stabilize, lower than before. It won’t rise in response to excess demand,
because there is no excess demand. The
market is in equilibrium.
Central
Asian policymakers make this mistake, too.
The point is that the price doesn’t just change on a dime. It responds to shocks – like international
sanctions choking demand – that throw the market out of kilter. Once it has brought the market back to
equilibrium, it will stay put, until the next shock.
Maybe the
Bank of Japan is referring to demand for all products, not just petroleum. When oil prices fall, Japanese consumers save money. They will spend much of
the savings on a variety of goods, raising their prices. That’s inflation.
Moral of
the story: The Journal should sharpen its blue pencils and edit for clarity. –Leon
Taylor tayloralmaty@gmail.com
Reference
Tatsuo Ito
and Kosaku Narioka. Japan
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