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Japan takes a singular path to recovery

Japan got through deflation in its own sweet way and its recovery is also idiosyncratic. In the long run the yen will slide but for now conditions will favour foreign investors, holding up the currency.

Japan is on the up. But its recovery will be as different from the textbook model as was its deflationary phase. During those 10 years, consumers kept spending. That, plus endless fiscal stimuli, is what kept the economy from imploding.

What made Japan's deflationary period really different was the nature of household wealth — about three years' annual GDP. This is not held in stocks as in the US or housing as in the UK. Rather, two-thirds of it is banked.

Deflation meant that the real value of bank deposits kept rising. So consumers were able to skim off a little each year without diminishing the real value of the deposits. Indeed, consumer wealth continued to rise slowly.

Japan is also an ageing society, meaning more is consumed and less saved. The driver of consumption switches from work earnings to pension benefits, and to income from investments and cash from selling them. Since 1998, Japan's households have lost ¥13 trillion in work income but gained ¥11 trillion in pensions — another support for consumption.

A final characteristic of post-bubble Japan is the way government spends. Deflation provided it with limitless, costless financing. There was a guaranteed buyer of government bonds — the Bank of Japan.

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