Yen-Pinching Undercuts Japan’s Push Against Years of Deflation

12-Mar-2014 Intellasia | NY Times | 6:00 AM Print This Post

The loose change in Yusa Nishimura’s purse could be undermining prime minister Shinzo Abe’s economic recovery plan for Japan.

As often as she can, Nishimura tucks away 500-yen coins, worth a little under $5. Nishimura, 23, even has a folder that displays them so Japan’s highest-denomination coins are easier to count.

Cash nest eggs like Nishimura’s made sense in slow-growing Japan, where during 15 years of deflation her money was worth more as time went on. The spa getaway she planned to splurge on was likely to get cheaper if she waited longer.

But as Abe faces pressure to show results in his fight to lead Japan out of deflation, he is urging cash hoarders like Nishimura to change their modest mind-sets – for the economy’s sake, as well as for their own.

Nishimura, like many Japanese, is unconvinced. “I’ve never experienced inflation. It doesn’t seem real to me,” said Nishimura, who works at a technology company in the port city of Kobe.

The result of this uncertainty could be a sputtering economic recovery in Japan, which has experienced a resurgence of sorts under Abe.

Just as Europe’s investors are getting nervous because of the rising possibility of deflation, more people are doubting Japan’s much-trumpeted fight to escape it. These concerns have been heightened by recent data suggesting unexpectedly weak economic growth in the fourth quarter. On Monday, the government said the economy had grown even more slowly than estimated, just 0.7 percent on an annualised basis, hurt by weaker-than-expected consumer spending and capital expenditures.

If more people expected a future of rising prices and wages instead of falling ones, Abe’s reasoning goes, they would spend now before goods became more expensive. To beat rising prices, they would also invest their money in higher-yielding investments. Companies, confident of a new era of higher sales and profits, would raise prices and wages, completing a positive economic cycle.

A big obstacle in Japan’s path, Abe says, has been the entrenched attitudes and behaviors in the country after so many years of falling prices. “It is not easy to alter a deflation mind-set that has been in place here for over 15 years,” Abe told Parliament last month.

For most countries, moderately rising prices are a normal part of life. A Big Mac hamburger in the United States, which went for about $2.50 in 1998, now costs over $4.50. Since the turn of the century, American consumer prices have risen from 1.5 to 4 percent a year.

But in Japan, overall prices have not risen since the late 1990s. The Big Mac still costs about the same here as it did in 1998: about 300 yen, or almost $3. The price of another popular fast-food offering – the beef-and-rice bowl from the Yoshinoya restaurant chain – has fallen from 400 yen in the late 1990s to 280 yen today. During that time, average worker incomes have also fallen.

Abe hopes his policies will change that. Since coming to power in late 2012, he has pursued aggressive economic and monetary policies to bring an end to deflation. His first measure, a blast of monetary policy that has doubled the country’s money supply, has already elevated prices by weakening the yen and pushing up the cost of energy and food imports.

Signs of a broader rise in prices are mixed. Japan’s Consumer Price Index rose just 0.4 percent in 2013. Discounting energy and food prices, the index actually fell 0.2 percent compared with 2012. Both are far below the Bank of Japan’s target of a 2 percent inflation rate by next year. The central bank voted Tuesday to keep its policy on hold.

But even that creep upward in prices has been greeted with shock and incredulity. Businesses across the country that are raising their prices are issuing long, apologetic notes. “It truly pains our hearts to announce that we will soon revise our prices,” the Kidoizumi brewery, which has made sake for 135 years in Chiba, east of Tokyo, said recently in an announcement, blaming rising energy and input costs for its price increase.

The slow progress in beating deflation reflects the difficulties of overcoming entrenched expectations and behaviors, especially among younger Japanese who have never experienced rising prices, said Taro Saito, senior economist at the NLI Research Institute in Tokyo.

Older generations still remember the “oil shocks” of the 1970s, which sent consumer prices soaring, as well the country’s asset bubble of the 1980s. More recently, they remember how Japan fell into deflation after its bubble economy burst in the early 1990s. But with deflation the norm for years now, younger Japanese tend to expect far less inflation than their seniors, according to a survey taken last year by the Cabinet Office.

This helps makes younger Japanese more cautious spenders, as well. A government survey of households last year highlighted stark intergenerational disparities: Households headed by people between 60-69 years increased spending by 2.7 percent, while households headed by under-30-year-olds spent 0.8 percent less. Economists worry that a planned sales tax increase here in April will further dampen consumer sentiment.

“It’s possible that long-term personal experiences with prices are affecting individual inflation expectations,” Saito said.

Some economists are beginning to question whether the obstacles to beating deflation lie with Abe’s policies, and not with consumers.

“Inflation should be driven by actual demand for goods and services,” said Shinya Imura, an economics professor at Chuo University in Tokyo. “But what’s happening now is something else. Businesses are raising prices because they’re being squeezed by higher input costs. That means businesses are unlikely to have the means to raise wages soon, and consumers aren’t going to buy more.”

This dynamic is clear at the Manrai ramen shop, a Tokyo institution loved by locals for its pork and leek broth and a longstanding commitment to rock-bottom prices. When Manrai recently raised the price of its cheapest bowl of ramen for the first time in over two decades, to 250 yen from 200, it caused consternation.

“I can’t believe it,” said Ryo Kobayashi, a recruitment agency worker and Manrai regular. “If prices start rising everywhere, I’m not going to be able to eat out anymore.”

Such reactions call into question Abe’s rosy vision of rising prices, profits and incomes. Manrai raised prices not because it was confident of future sales but because it was squeezed by higher input costs, including electricity, gas, pork and noodles made from imported flour.

In fact, by raising prices, Manrai risks losing customers like Kobayashi. (“I’ll fry up cheap vegetables like bean sprouts,” he said.)

Rather than start an economic revival, this “cost-push” inflation, as economists call it, could become a rising threat to Japanese stuck in a deflationary mind-set. Such people could see their hard-earned savings eroded by rising prices, warned Yukio Sakurai, a housing analyst based in Tokyo.

And choices that made sense under deflation – renting, for example, instead of investing in property – could saddle them with mounting costs, erode their standard of living and shut them out of any benefits of a stronger economy, experts warn.

“Younger Japanese need to change their mind-sets now, or get left behind,” Sakurai said. “They would do well to talk to their parents and grandparents.”


Category: Japan

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