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Deflation hobbles
Japan
By Matthew Rusling
OSAKA - Despite a surprise increase of
1.3% in this year's first-quarter GDP, Japan is
not quite headed for an economic rebound. One big
problem, say experts, is still that ghost of
Japan's economic past, present and perhaps future:
deflation. In its latest Outlook for Economic
Activity and Prices, the Bank of Japan is
forecasting a 0.1% decline in consumer prices in
fiscal year 2005 from FY2004. Although the same
report estimates a price increase for FY2006 of
0.3%, experts have called this miniscule.
Deflation has been a significant
contributor to Japan's economic woes in recent
years, and appears to be still a problem, say
experts. In the late 1990s, many Japanese
companies and households suffered from excessive
debt. Prices declined, which had a negative effect
on the country's business climate and began a
series of deflationary slumps that continues
today. Many use a common euphemism to describe the
economy's lack of spunk, saying it is still stuck
on a "stairway landing". A report by the Cabinet
Office in Tokyo last week revealed that the
world's second-largest economy grew at an
annualized 5.3% pace in the three months ended
March 31. But experts fret that despite the
surprisingly positive numbers, the economy has yet
to make a real comeback.
"People are
struggling to make profits," says Noriko Hama, an
economist at Doshisha University School of
Management. She says jobs can be affected when
deflation plays a significant role in an economy.
"Companies will be careful about expanding their
labor force."
A deflationary environment
often has all the trappings of a healthy economy.
There can be booming sales, for instance, but due
to low prices, those sales will not be reflected
in company profits. Hama says that despite Japan's
massive trade with China, deflation has negated
any positive outcome. Insatiable demand from China
for Japanese steel, cars and heavy machinery has
not done much to fill Japanese corporate coffers
because the prices are just too low. This
quarter's GDP increase might not do much to
alleviate the situation. "In certain sectors,
growth has had an effect but it has not been
significant...it has not been much of a genuine
growth."
This lack of growth is not likely
to affect whole industries this year, but there
are sure to be winners and losers. "Whether an
industry will be affected or not will depend on
its cash flow...it will not depend on the sector,"
says Teruhiko Mano, an economist at Seigakuin
University Graduate School.
There are
enormous differences between the companies who
have dealt well with deflation and those who have
not. Hama points to several: "...Toyota and Nissan
[have dealt with it well], as opposed to
Mitsubishi Motors [which was a]...huge loser. In
banking, MTFG as opposed to UFJ. In electronics,
Matsushita as opposed to Sony. In retailing,
Itoh-Yokodo, not Daiei. The defining element is
how these respective companies have embraced and
dealt with a vastly altered economic environment.
How they have contrived to live with, and ride
out, deflation has made all the difference."
Historically, firms as a whole tended to
be an economic barometer. "When things were good,
everybody did well...In bad times, vice versa,"
says Hama. Now some Japanese businesses may be
becoming more flexible, able to deal with and
learn from circumstances that may seem somewhat
economically unsound. "In the past, this kind of
behavior was not typical of Japanese businesses."
The nature of Japan's deflation is,
however, debated in some circles. Mano does not
believe that Japan is experiencing deflation.
Rather, it is undergoing a bubble reversal. "We
should not necessarily call this deflation. At the
end of 1989, the Nikkei Dow [stock index] reached
almost 40,000 and land prices peaked in 1990.
After that bubble burst, the price of land came
down every year. People are calling that
deflation. But I call it bubble reversal."
Whether the bubble will continue to
deflate is unknown, but, seeing a light at the end
of the tunnel, some experts are saying any
sluggishness in Japan's economy may yet turn out
to be short-lived. "The 0.1% decline forecast for
FY2005 is due to temporary factors, such as the
continuous slump of Japan's economy, and the
declines in the price of rice as well as
telecommunication costs," says Hisashi Yamada, an
economist at the Japan Research Institute.
But he adds that this year's apparently
gloomy economic outlook may not continue into next
year. "These temporary factors will disappear,"
says Yamada, referring to the 0.3% price increase
outlook for FY2006. "Japan's economy will soon
come out of deflation and get on the path of
sustainable growth, though it will be a gradual
one. It means a decline in the unemployment rate
and an increase in profits, rather than the
increase in layoffs and loss in profits. Since the
1990s, households and companies that had gone into
debt have gradually paid back. Recent price
decreases have also had a positive influence on
the households that have financial assets and no
debts, mainly the older population."
Matthew Rusling is a freelance
writer in Osaka. He can be reached at
mjrjapan@yahoo.com.
(Copyright 2005
Asia Times Online Ltd. All rights reserved. Please
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