How Japan Can Get Out From 10 Year Deflation?

November 22, 2009 – Osaka, Japan

Yesterday Nikkei, Japan’s leading newspaper specialized in economy/business and politics, reported that in November’s Monthly Economy White Paper issued on November 20, the Japanese economy is “in the moderate deflation status”. It is first time in 3 years and 5 months since June 2006 that the Japanese government officially identified deflation in the monthly white paper. Although the domestic economy has started to improve, with decrease in prices, there is a risk that company revenues deteriorate and unemployment increases. Therefore, the government is to speed up to drafting revised budget plan focusing on employment measures etc. The Japanese Economy will be much hobbled by deflation, and Mr. Kan Naoto, the Deputy Prime Minister, requested BOJ (Bank of Japan) also to cooperate to lead out from deflation in the press conference held on November 20. However, financial measure that BOJ can take is extremely.

According to Nikkei, Mr. Shirakawa, the Bank of Japan Governor, refrained from explicitly stating that the Japanese economy is in the deflation status in the press conference held on November 20 after Monetary Policy Meeting, but Mr. Kan judged as deflation for the following three reasons.

1. CPI (Consumer Price Index) is continuously decreasing. (This is conspicuous compared with western countries).
2. Respective index growth rate has been below actual for two consecutive quarters,
3. “Demand-Supply gap”, which is subtracting potential supply capacity from demand, has been minus and the degree of minus has expanded to 40 billion yen/year. This is a huge demand deficit.

The Actual Deflation is Much More Severe than the Statistics
(Source: Nikkei, translated by the author)

Item / Actual Purchasing Price vs. Previous Year / Actual Purchasing Price (yen) / CPI vs. Previous Year / CPI Sales Price (yen)
Men’s Suits / -40.4 / 23,604 / -1.7 / 37,092
TV Sets / -26.6 / 119,900 / -33.6 / 90,914
Skirts / -25.4 / 5,153 / -2.5 / 8,728
Umbrella / -23.3 / 801 / -0.8 / 2,505
Handbag / -19.0 / 7,399 / 0.2 / 15,905
Children’s Shirts / -13.9 / 952 / -2.9 / 637
Blouse / -12.0 / 3,647 / 1.2 / 5,742
Boy’s Socks / -7.8 / 298 / -0.9 / 679
Notes: Actual purchasing price is from purchasing price from family budget survey. Sales price is September’s price of Tokyo retail price statistics survey, which is the original statistics of CPI.

The reason for the government’s judgment is September’s CPI (excluding fresh food) was -2.3 from a year ago, and until August CPI has been dropping for four consecutive months and the degree of the minus for September was the biggest ever. Many private research institutes estimate that for three years the price drop trend continues. In fact, it is quite possible that the deflation has been going on for the past 10 years of so since September 1998.

Actual price drop might well be much more severe than the statistics, because CPI includes only basic items and excludes knockout price PB (Private Brand) and bargain products. For example, for men’s suits, the drop of CPI is 1.7% by statistics but when the government analyzed including knockout price products the actual average price was minus as much as 40%.

With continues drop in price, company revenues would not increase (or rather decrease), meaning household income would not increase. GDP for July-Sep was plus for two consecutive quarters, but respective GDP (assumed to reflect more accurately actual sense of economy) has been minus for six consecutive quarters. Respective item GDP is 479 billion yen/year and income is 254 billion yen/year, both of which are the level of 1992.

Without increase in company revenues and income, solid sense of economy recovery cannot be achieved. This means that government would not be able to gain their revenue from corporate tax, individual income tax and consumption tax, leading to further deterioration in financial situation.

Among major countries, Japan is the only country going through severe deflation. As for “Demand-Supply gap”, Japan is approximately -7%, whereas western countries are 3-4%. This is because market of automobile and consumer electronics, Japan’s primary export products, shrunk drastically, leading to severe over supply. In addition, chronic domestic demand decrease attributing to low birthrate with longevity is also a negative factor.

Outlook of deflation spiral in which price drop is linked with deterioration in economy cannot be denied. Retail giants have jeans with price less than 1,000 yen but sales of super markets have been decline from the previous year’s results for 10 consecutive months. Companies are going through war of attrition in which they cut margin to lower the price. The outlook of bonus for this winter for major companies is minus by 2 digits from a year ago, and downward pressure of employment and income environment is expected to become stronger and stronger.

Demand insufficiency of 40 billion yen needs to be resolved to get out of deflation. Although the government is insisting that this can be achieved by stimulating domestic demand with incentive to households with children, such stimulation is insufficient. Many experts believe that the possible solution is aggressively taking in external demand such as of China and other emerging countries.