Japan caught in deflation conundrum
By Christopher Johnson
TOKYO - If you live in Southeast Asia and need cheap clothing, come to Tokyo
and check out these prices: 700 yen (US$7.45) for jeans, 1,000 yen for women's
boots, and 7,800 yen for men's suits - about a third of what they cost a decade
ago, when Japanese used to go to Bangkok and Hong Kong to shop.
For 12 straight months, prices in Japan have been falling, the country's
Statistics Bureau said last week, and land prices are roughly half what they
were 20 years ago. Prices fell by 1.2% in February from a year earlier. The
finance minister and Bank of Japan board members are promising to stem the
price slide, and many financial analysts are warning that further "de-flay"
could delay any economic recovery.
Declining prices can encourage consumers, expecting further price falls, to
delay purchases. That hits company turnover and
profits, prompting further price cuts and factory lay-offs to stem costs -
further eroding overall consumer purchasing power and sales. Government income
from sales and other taxes is also hit in the downward price spiral.
Yet Eisuke Sakakibara, famous as "Mr Yen" when he was a top bureaucrat at the
Ministry of Finance in the 1990s, argues that Japan's deflation is not
necessarily a bad thing. "We aren't in a deflationary spiral. I do not think
mild deflation in Japan is a bad thing," he said at a forum of financial
analysts last week in Tokyo. "We should enjoy mild deflation, rather than
ponder it as a disease."
Sakakibara says deflation is due to economic integration, as intra-regional
trade in East Asia reaches 57% of all the region's trade. "If you import cheap
goods from China, then naturally prices will come down, compared to the
conventional prices we're used to in Japan. It's very difficult to avoid
deflation by monetary policies, when it's because of structural changes.
Relatively slow deflation is something given."
Yet many others strongly disagree, saying deflation will further dampen
economic growth and lead to an eternally greater burden of debt compared with
what the country produces, or gross domestic product (GDP).
"Deflation is a bad thing. People don't want to spend money, that is the big
problem," says Masaaki Kanno, a former senior official of the Bank of Japan,
currently chief economist at JP Morgan in Tokyo. "Now deflation and the economy
are affecting each other. It's not easy to see what is the egg and what is the
chicken. Without ending deflation, the government's target of 3% growth is
impossible."
The Japanese economy grew by 0.9% in the final three months of last year, or
3.8% on an annualized basis.
"Deflation corrodes the health of your economy long term," says Richard Jerram,
head of Asian economics for Macquarie Capital Securities in Tokyo.
"Non-manufacturing companies are more pessimistic than they were a year ago.
Deflation means it's impossible to fix the fiscal problems in the economy
without some nominal growth. If you have persistent deflation for the next five
to 10 years, public finances are going to crash."
As prices and wages fall, many Japanese are putting off purchases of appliances
or cars, since they might be cheaper next year. Yet when chatting in
supermarkets about "de-flay" (deflation) and "in-flay" (inflation), many
Japanese say they are kowaii (afraid). After seeing prices spiral too
high in the 1980s and subsequently decline, they still don't reflect the real
worth of things.
Tokyo consumers, who tend to rent apartments, even when they cost $1,000 for a
tiny living space in the suburbs, rather than own homes, are all for cheaper
food, clothing and housing in a city where urban parking spots fetch between
US$200 to $600 a month. Many feel that prices still have a long way to fall
toward "normal" levels.
Things haven't been normal since the early 1980s, when the Japanese currency
stood at 300 yen to the US dollar (compared with 93 this week). Back then, a
spartan room in a seaside village bed-and-breakfast (minshuku), at 3,000
yen per person, equated to $40 total for a family of four; a fair rate, not
unlike a decent motel in America. Since workers could easily afford a 900 yen
lunch special of pork on rice with miso soup, thousands of mom-and-pop shops
sprouted up to serve them, fostering a culture of full employment, which
attracted thousands of foreign workers.
After the 1985 Plaza Accord, major powers intervened in currency markets to
weaken the dollar and strengthen the yen. The goal, echoed in present-day
international pressures on China, was to open Japan to more imports and slow
down its export juggernaut. The yen quickly doubled in value, and property
values skyrocketed, to 50 times their 1950s levels in some cases. Even the
cramped wooden house where this correspondent lived in the Osaka area in 1989
was worth $1 million at that time.
Expecting Japanese to get wealthier, businesses jacked up their prices to
absurd levels, and Japanese kept buying $60 bottles of wine and $100 melons
because they feared prices would rise further. But when the bubble burst, and
the stock market benchmark index, the Nikkei 225, shrank from 39,000 to 9,000
in the 1990s, prices didn't fall accordingly. Many landlords, farmers, and
suppliers stubbornly held their prices firm, believing consumer demand would
recover - which it never did.
Today, even amid Japan's worst downturn since the war, minshuku owners still
expect a family of four to pay 12,000 yen, despite 25 years of wear and chronic
vacancy as city-folk stay home instead of taking weekend breaks.
Any sudden jump in economic growth might not boost prices. During the export
boom of 2006, Japanese corporations channeled record profits toward research
rather than into rewards for their workers. Employees felt betrayed, and
refrained from buying their own company's products. Since wages on average were
still 10% lower than 1997 levels, household spending continued to drop.
Suburban property values, meanwhile, have fallen to half of their 1990 peak.
Even though home prices are less "stupid" than before - as many Japanese say -
many younger workers are either afraid of losing their jobs, or are waiting for
prices to sink to a lower bottom. China's boom can't help, because Chinese
can't build cheap houses and bring them to Japan.
Given Japan's declining population, policymakers are faced with tough choices
on how to turn things around. The Bank of Japan last month doubled a credit
program for commercial lenders to 20 trillion yen. Governor Masaaki Shirakawa
said he hoped the move would lower borrowing costs and spur growth and prices.
Former BoJ official Kanno says the central bank should lead the way out of
deflation.
"The BoJ is responsible for ending deflation," he says. "They shouldn't wait
for the government. Discussing inflation targeting is simply a waste of time.
People's price expectations will not be affected by higher inflation targets."
Kanno says spending 40 trillion to 50 trillion yen might trigger inflation but
wouldn't be sustainable and would increase debt servicing costs. "All the best
policies are going to have short-term pain to get the best long-term results.
Without taking these risks, Japan will fall into a trap which we can't find an
exit. The government should let people know how bad deflation is. Japanese
journalists don't want to tell the truth to the Japanese public. The current
public pension system will not be sustained."
While agreeing with many of Kanno's points, Macquarie Capital's Jerram doubts
whether the central bank can fight deflation on its own.
"Deflation everywhere else is a monetary phenomenon, but Japan sees itself as
unique, because deflation is due to deregulation," says Jerram, who has been
monitoring Japan for two decades. "The tolerance of deflation is extremely
unorthodox. The United States for example will take extreme measures to avoid
going into the deflation hole. The problem with tolerating it is, you wake up
one day and feel the need to do something about it. Japan is in such a deep
hole, that a little bit of fiddling around the edges, such as what the Bank of
Japan is doing, is not going to make that much of a difference."
Jerram says the politicians should take action instead of telling the BOJ to
try harder. "I think the government doesn't understand it well enough. To be
fair to them, they just took office six months ago, and they're starting to see
how bad things are. You need to tell the public that the last 10 to 15 years
have been a terrible mistake. It's a question of whether you want a crisis now
or a crisis later."
One solution, he says, is to set short-term interest rates at minus 3 or 4%.
"The idea that nothing can be done is a fantasy. If you fight deflation, it
appears to hurt pensioners and lower income workers, but it might be better in
the long term."
Yet Sakakibara warns that extreme measures could make things worse.
"Just because prices are coming down doesn't mean Japan is in a recession. We
just had a recovery combined with deflation. We shouldn't worry about deflation
too much," says Sakakibara, now a professor at Waseda University. "Taking
actions to solve deflation might have some undesirable side-effect. We need to
really worry when deflation comes with a recession."
Tokyo-based journalist Christopher Johnson (www.globalite.posterous.com) is
author of Siamese Dreams and an upcoming novel set in Japan
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