Osaka – Saturday, January 30, 2010
Nikkei, specialized in economy/business and politics, reported on January 28 that financial performance of many major Japanese manufacturers have started to recover drastically driven by external demand. It seems that Sony’s consolidated operational profit has gone back to black by 1000 billion yen after 5 quarters for October – December 2009. Honda also seems to double its consolidated operating profit for the same period from the previous quarter of July – September 2009. Ongoing revenue improvement attributes to changing to profit structure more optimized for generating profit by fixed cost reduction and productivity efficiency improvement, plus increase in external demand with worldwide economy recovery.
Better Profit Generation with Cost Reduction
(Source: Nikkei, edited and translated by the author)
Company Name / Operating Revenue (billion yen) / Operating Revenue for Previous Year (billion yen) / Factors
Sony / Approx. 100 / -17.9 / Cost reduction. TV and game business recovering
Honda / 120 - 170 / 102.4 / Strong fuel efficient car business in India and Thailand. Japan business getting stronger as well.
Toshiba / Approx. 10 / -158.8 / Improvement in fixed cost and recovery in semiconductor business.
Canon* / 92.1 / 35.8 / Recovering in worldwide camera sales. Expense compressed.
Fuji Film Holdings / Approx. 5 / 1.2 / Improvement in LCD film and business machine business.
TDK / More than 11 / -5.1 / Strong hard disk related business.
Murata Manufacturing Company / Approx. 11 / -3 / Demand increase in electronic components for PC etc.
Note: For October – December 2009. Canon’s data is of announcement, others is of Nikkei estimation.
Sony drastically improved its game and LCD TV business that were in a slump. PS (Play Station) 3 that had reduced manufacturing cost made a big hit with positive effect of price reduction in the U.S. which contributed to returning to black after 4 quarters. LCD TV sales are now strong in the U.S., Japan and China. Job cuts and site integration contributed to improving operating profit and loss to zero level. However, operating profit improvement that had once been estimated to be 20 billion yen for fiscal year ending March 2010 is expected to be limited. This is because there are anxieties such as restructuring expense to accumulate toward the end of March 2010, and uncertainties/risks such as high yen.
Honda is improving its financial performance driven by growth in the emerging market. Fuel efficient small and medium size car business has become strong in Asia such as India and Thailand, and cost reduction measures such as enhancing local content contributed to positive effect. As a result, Honda’s consolidated operating profit for October – December 2009 seems to have doubled from July – September 2009 to 120 – 170 billion yen.
Honda produced approximately 890,000 cars worldwide October – December 2009, which is increase by 80,000 from July – September. Honda’s bicycle business is also strong in emerging market in particular. Operating profit is estimated to reach 190 billion yen for fiscal year ending March 2010, but it is possible that it reaches more than 300 billion yen.
Companies such as Hitachi is benefiting from worldwide automobile sales recovery, which is decreasing its operating loss of automotive equipment business. Hitachi’s flat panel TV business is also improving. As a result, Hitachi’s consolidated operating profit seems to recover reaching 100 billion yen, which is much more than the original plan of 20 billion yen.
Although there are anxieties and uncertainties such as high yen and domestic economy plunging again, it is expected that revenue of major manufacturers continues to improve driven by external demand. Canon announced its financial performance for fiscal year ending December 2009 on January 27, 2010, in which it estimated that consolidated operating profit for fiscal year ending December 2010 is to reach 330 billion yen, which is +52% from previous year. This is due to continuation of strong sales of single-lens reflex camera, which is of high profitability, especially in China.
It is a pity that Toyota is not one of the manufacturers that is drastically recovering its financial performance, with recent recalls.
2010年1月24日日曜日
China Business Drives Financial Recovery of Japanese Companies
Sunday, January 24, 2010 – Osaka, Japan
Nikkei, Japan’s leading newspaper specialized in economy/business and politics, reported on January 23 that according to the outlook of financial performance for fiscal year ending March 2010, China business is to be the driver for many automobile and machinery manufacturing companies. For Nissan and Komatsu, 40%-50% of consolidated operating profit is estimated to be generated from China business and profit by region for China is to be greater than those of developed countries. This shows that Chinese economy is driving recovery of company financial performance when demand of Japan, the U.S. and Europe continues to plunge. Having said that, some experts say that Chinese economy seems to be overheated and competition is getting more and more severe. China is a promising marketing but there are challenges/issues such as risk management and thorough cost reduction.
1. How Chinese economy has been?
Chinese economy has been revitalized with positive effect of the economy stimulation measures implemented by the Chinese government (approximately 53 trillion yen) in November 2008. Chinese economy has recovered to 2 digit growth for October – December 2009 and its presence has been enhancing in the world economy.
2. How have Japanese companies been benefiting from revitalized Chinese economy?
China has become the largest automobile market (unit base) in the world last year, and Japanese automobile companies also have been increasing their sales, in particular Nissan. Nissan was quicker than other Japanese companies in strengthening product lines of small cars and developing sales/distribution network, leading to approximately 750,000 unit sales (almost +40% from previous year) for 2009. Operating profit from China business is expected to reach 50-60 billion yen, which is almost half the consolidated operating profit. Nissan estimates to enjoy consolidated operating profit of 120 billion yen when Toyota is estimated to remain in red. Nissan is quicker in recovering its financial achievement by generating profit in growing marketing of China.
Component manufacturers are also benefitting from demand growth in China. NSK’s business in the developed countries remains in low level and is expected to generate 60% - 70% of its consolidated operating profit from China business.
Chinese Business Outlook of Japanese Automobile and Machinery Manufacturers
(Source: Nikkei, edited and translated by the author)
Company Name / Operating Profit: % of China Business / Consolidated Operating Profit (billion yen) / Vs. Previous Year / Trend of Chinese Business
Nissan / Almost 50% / 120 / Returning to black / Quick in establishing sales distribution network, leading to sales growth of almost 40% for 2009
Honda / +40% / 155 / +13% / Strong sales of Accord in cities on the coast
Komatsu / About 40% / 72 / -53% / Strong hydraulic shovel business, growth by 30%, overwhelming Japan business
Furukawa Electric / +25% / 10 / +3% / With strong infrastructure investment, high voltage cable in full production in China and increase in business growth
NSK / 60% / - 70% / 8 / -64% / Bearing business grows targeting automobile and industry machinery companies, when business in Japan, the U.S. and Europe continues to plunge
Regarding machinery manufacturers, sales of China for Komatsu and Hitachi Construction Machinery are approximately 20% of worldwide business, which is greater than Caterpillar. Reducing cost by manufacturing locally, Komatsu’s operating profit from Chinese business is almost 40% of worldwide business, and Komatsu is quicker than Caterpillar in recovering its financial performance.
More companies in other industries are benefitting from growing Chinese market. For example, Toto’s business of luxurious toilets (using luxurious materials etc.) is strong in China. Their China business is expected to be in black when Japan and other business are expected to remain in red. Operating profit from China business is to reach approximately 30%, the biggest worldwide.
3. What are the anxieties and risks of Chinese economy and business?
Chinese economy seems to be overheated, according to some experts. It is prominent that increase in export of steel material to Chinese market is contributing to consolidated financial performance for iron and steel giants. However, many of the executives in this industry are cautious, commenting that “if credit squeeze measure at to be taken (to prevent overheating), the current strong steel material market trend in China may well change”.
Honda is enjoying strong sales of Accord in China but profit of joint venture business in China is to remain the same with previous year. It is because price erosion is extreme in China, when each company strengthens production and sales organization. As proportion of Chinese business increase, necessity of risk management for business fluctuation and increase in competition in this market increases.
Nikkei, Japan’s leading newspaper specialized in economy/business and politics, reported on January 23 that according to the outlook of financial performance for fiscal year ending March 2010, China business is to be the driver for many automobile and machinery manufacturing companies. For Nissan and Komatsu, 40%-50% of consolidated operating profit is estimated to be generated from China business and profit by region for China is to be greater than those of developed countries. This shows that Chinese economy is driving recovery of company financial performance when demand of Japan, the U.S. and Europe continues to plunge. Having said that, some experts say that Chinese economy seems to be overheated and competition is getting more and more severe. China is a promising marketing but there are challenges/issues such as risk management and thorough cost reduction.
1. How Chinese economy has been?
Chinese economy has been revitalized with positive effect of the economy stimulation measures implemented by the Chinese government (approximately 53 trillion yen) in November 2008. Chinese economy has recovered to 2 digit growth for October – December 2009 and its presence has been enhancing in the world economy.
2. How have Japanese companies been benefiting from revitalized Chinese economy?
China has become the largest automobile market (unit base) in the world last year, and Japanese automobile companies also have been increasing their sales, in particular Nissan. Nissan was quicker than other Japanese companies in strengthening product lines of small cars and developing sales/distribution network, leading to approximately 750,000 unit sales (almost +40% from previous year) for 2009. Operating profit from China business is expected to reach 50-60 billion yen, which is almost half the consolidated operating profit. Nissan estimates to enjoy consolidated operating profit of 120 billion yen when Toyota is estimated to remain in red. Nissan is quicker in recovering its financial achievement by generating profit in growing marketing of China.
Component manufacturers are also benefitting from demand growth in China. NSK’s business in the developed countries remains in low level and is expected to generate 60% - 70% of its consolidated operating profit from China business.
Chinese Business Outlook of Japanese Automobile and Machinery Manufacturers
(Source: Nikkei, edited and translated by the author)
Company Name / Operating Profit: % of China Business / Consolidated Operating Profit (billion yen) / Vs. Previous Year / Trend of Chinese Business
Nissan / Almost 50% / 120 / Returning to black / Quick in establishing sales distribution network, leading to sales growth of almost 40% for 2009
Honda / +40% / 155 / +13% / Strong sales of Accord in cities on the coast
Komatsu / About 40% / 72 / -53% / Strong hydraulic shovel business, growth by 30%, overwhelming Japan business
Furukawa Electric / +25% / 10 / +3% / With strong infrastructure investment, high voltage cable in full production in China and increase in business growth
NSK / 60% / - 70% / 8 / -64% / Bearing business grows targeting automobile and industry machinery companies, when business in Japan, the U.S. and Europe continues to plunge
Regarding machinery manufacturers, sales of China for Komatsu and Hitachi Construction Machinery are approximately 20% of worldwide business, which is greater than Caterpillar. Reducing cost by manufacturing locally, Komatsu’s operating profit from Chinese business is almost 40% of worldwide business, and Komatsu is quicker than Caterpillar in recovering its financial performance.
More companies in other industries are benefitting from growing Chinese market. For example, Toto’s business of luxurious toilets (using luxurious materials etc.) is strong in China. Their China business is expected to be in black when Japan and other business are expected to remain in red. Operating profit from China business is to reach approximately 30%, the biggest worldwide.
3. What are the anxieties and risks of Chinese economy and business?
Chinese economy seems to be overheated, according to some experts. It is prominent that increase in export of steel material to Chinese market is contributing to consolidated financial performance for iron and steel giants. However, many of the executives in this industry are cautious, commenting that “if credit squeeze measure at to be taken (to prevent overheating), the current strong steel material market trend in China may well change”.
Honda is enjoying strong sales of Accord in China but profit of joint venture business in China is to remain the same with previous year. It is because price erosion is extreme in China, when each company strengthens production and sales organization. As proportion of Chinese business increase, necessity of risk management for business fluctuation and increase in competition in this market increases.
2009年12月6日日曜日
Service Price Drop in Japan Prominent: The Biggest Among 10 Major Countries
December 6, 2009 – Osaka, Japan
Today Nikkei, Japan’s leading newspaper specialized in economy/business and politics, reported that price drop in service sector such as accommodation and hair dressing is severe in Japan. According to nationwide CPI* (Consumer Price Index), “general service” sector has been minus vs. previous year for 6 consecutive months, and for October the decrease ratio was the biggest in statistic history. With worldwide demand decrease, CPI has been dropping in western countries as well but Japan is the only country whose service price is minus. Ongoing price drop likely leads to stronger pressure for decrease in wages. Economic recovery driven by domestic demand that Hatoyama administration aims at is not easy.
Main Services Whose Price Has Dropped (As of October 2009)
(Source: Nikkei, translated by the author)
Service Name / CPI (vs. October 2008) / Actual Price (In Yen)
Accommodation / -2.0 / 16,032
Beef-on-rice dish / -0.3 / 390
Tatami mat repair / -0.3 / 6,871
Air conditioner installation / -0.4 / 14,043
Cleaning (men’s suit) / -0.2 / 1,108
Package tour (abroad) / -22.8 / 67,080
Monthly fees for English conversation lessons / -0.6 / 20,277
Playing golf / -4.2 / 14,031
Video rental / -12.9 / 317
Esthetic clinic / -0.1 / 13,065
Note: Index is of nationwide. Prices of accommodation, package tour (abroad) are of nationwide. Prices of all the rest is of Tokyo.
Prices of general services have been minus vs. previous year for 6 consecutive months since May this year, and it was -0.6% for October. Overall service including public sector was -0.5%, the biggest drop together with February 2005 since 1971 (statistics are available from 1971). During the 7-year deflation that started in 1998, price drop in service sector such as dining out was prominent but for general service sector, the biggest drop had been 0.3% of February 2001. Looking by industry, culture and entertainment service was -3.1%, accommodation was -2.0%, package tour (abroad) was -22.8%, playing golf was -4.2%, and using karaoke room was -2.6. Among dining out, “symbol of deflation items” of bee-on-rice dish and hamburgers were minus vs. October 2008.
Frequency of using services also is decreasing and expenditure of household is greater than drop in unit price. According to household budget survey executed in October 2009, expenditure for tea and coffee of households with two or more wage-earners was -14.3%. Services related to clothing such as cleaning was -6.6%. Package tour was -8.0% and monthly fee for foreign language lessons was -5.6%.
Price drop for Japan is prominent compared to western countries; service prices was +0.9% for the U.S. and +1.8% for EU. One reason that Japan’s service prices tends to drop easily unlike western countries is difference in employment practice. Large portion of service cost is labour cost. When demand decreases, many western countries immediately cut jobs to align supply capacity with demand decrease and maintain prices. However, Japan still tends to prioritize job preservation. Many Japanese service companies try to preserve jobs in severe competition in their service sector, and therefore they are faced with bigger pressure to lower wages.
Another reason for price drop is the fact that Japan is facing severe demand shortage (over supply). According to estimation of IMF (International Monetary Fund), “demand-capacity gap” between actual demand and potential supply capacity is between -3% and -4% for western countries but is as high as -7% for Japan. In amount, Japan’s demand shortage is as big as 35 trillion yen/year and deflation pressure is large.
Service sector is an important market covering almost 60% of Japan domestic consumption, so price drop in this sector tends to lead to lowering of wages and it cannot be denied that it triggers further deflation. Hatayama administration advocates that it is to stimulate domestic demand by incentives for bringing up children etc. However, if price drop should continue, revenues of companies would not grow and it is quite possible that economy boosting measures as increase in income become ineffective.
* CPI (Consumer Price Index)
(Source: Nikkei, edited and translated by the author)
CPI is an economic indicator used to understand price trend of products and services that consumers pay to purchase. In Japan, MIC (Ministry of Internal Affairs and Communications) announces the index monthly. Index including items whose price fluctuation is large such as fresh foods draws much attention, and this index is an important factor for BOJ (Bank of Japan) in making policies such as interest rate cut. With continuous drop in index, the government also officially announced that Japan is in deflation status in November, as mentioned in the previous article How Japan Can Get Out From 10 Year Deflation?
Some experts point out that actual price fluctuation has not been accurately tracked in recent years. This is because the items used in calculating index are mainly regular items traded and distributed nationwide, when market share of PB (Private Brand) products are increasing in super markets, meaning the actual price drop (actual price that consumers pay) is bigger than that of the index.
Today Nikkei, Japan’s leading newspaper specialized in economy/business and politics, reported that price drop in service sector such as accommodation and hair dressing is severe in Japan. According to nationwide CPI* (Consumer Price Index), “general service” sector has been minus vs. previous year for 6 consecutive months, and for October the decrease ratio was the biggest in statistic history. With worldwide demand decrease, CPI has been dropping in western countries as well but Japan is the only country whose service price is minus. Ongoing price drop likely leads to stronger pressure for decrease in wages. Economic recovery driven by domestic demand that Hatoyama administration aims at is not easy.
Main Services Whose Price Has Dropped (As of October 2009)
(Source: Nikkei, translated by the author)
Service Name / CPI (vs. October 2008) / Actual Price (In Yen)
Accommodation / -2.0 / 16,032
Beef-on-rice dish / -0.3 / 390
Tatami mat repair / -0.3 / 6,871
Air conditioner installation / -0.4 / 14,043
Cleaning (men’s suit) / -0.2 / 1,108
Package tour (abroad) / -22.8 / 67,080
Monthly fees for English conversation lessons / -0.6 / 20,277
Playing golf / -4.2 / 14,031
Video rental / -12.9 / 317
Esthetic clinic / -0.1 / 13,065
Note: Index is of nationwide. Prices of accommodation, package tour (abroad) are of nationwide. Prices of all the rest is of Tokyo.
Prices of general services have been minus vs. previous year for 6 consecutive months since May this year, and it was -0.6% for October. Overall service including public sector was -0.5%, the biggest drop together with February 2005 since 1971 (statistics are available from 1971). During the 7-year deflation that started in 1998, price drop in service sector such as dining out was prominent but for general service sector, the biggest drop had been 0.3% of February 2001. Looking by industry, culture and entertainment service was -3.1%, accommodation was -2.0%, package tour (abroad) was -22.8%, playing golf was -4.2%, and using karaoke room was -2.6. Among dining out, “symbol of deflation items” of bee-on-rice dish and hamburgers were minus vs. October 2008.
Frequency of using services also is decreasing and expenditure of household is greater than drop in unit price. According to household budget survey executed in October 2009, expenditure for tea and coffee of households with two or more wage-earners was -14.3%. Services related to clothing such as cleaning was -6.6%. Package tour was -8.0% and monthly fee for foreign language lessons was -5.6%.
Price drop for Japan is prominent compared to western countries; service prices was +0.9% for the U.S. and +1.8% for EU. One reason that Japan’s service prices tends to drop easily unlike western countries is difference in employment practice. Large portion of service cost is labour cost. When demand decreases, many western countries immediately cut jobs to align supply capacity with demand decrease and maintain prices. However, Japan still tends to prioritize job preservation. Many Japanese service companies try to preserve jobs in severe competition in their service sector, and therefore they are faced with bigger pressure to lower wages.
Another reason for price drop is the fact that Japan is facing severe demand shortage (over supply). According to estimation of IMF (International Monetary Fund), “demand-capacity gap” between actual demand and potential supply capacity is between -3% and -4% for western countries but is as high as -7% for Japan. In amount, Japan’s demand shortage is as big as 35 trillion yen/year and deflation pressure is large.
Service sector is an important market covering almost 60% of Japan domestic consumption, so price drop in this sector tends to lead to lowering of wages and it cannot be denied that it triggers further deflation. Hatayama administration advocates that it is to stimulate domestic demand by incentives for bringing up children etc. However, if price drop should continue, revenues of companies would not grow and it is quite possible that economy boosting measures as increase in income become ineffective.
* CPI (Consumer Price Index)
(Source: Nikkei, edited and translated by the author)
CPI is an economic indicator used to understand price trend of products and services that consumers pay to purchase. In Japan, MIC (Ministry of Internal Affairs and Communications) announces the index monthly. Index including items whose price fluctuation is large such as fresh foods draws much attention, and this index is an important factor for BOJ (Bank of Japan) in making policies such as interest rate cut. With continuous drop in index, the government also officially announced that Japan is in deflation status in November, as mentioned in the previous article How Japan Can Get Out From 10 Year Deflation?
Some experts point out that actual price fluctuation has not been accurately tracked in recent years. This is because the items used in calculating index are mainly regular items traded and distributed nationwide, when market share of PB (Private Brand) products are increasing in super markets, meaning the actual price drop (actual price that consumers pay) is bigger than that of the index.
2009年11月22日日曜日
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.
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.
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