FOR nearly two decades, Japan has struggled to generate inflation. Any will do, even the bad kind – from higher oil prices to surging food-import costs. Rising consumer prices, Tokyo officialdom says, will restore Japan’s pre-1990s greatness and position it to take on China. But a government that thinks inflation is the answer to everything still isn’t asking the most important question: What happens when Japan actually gets some?
The immediate problem is bonds. The world knows no more obvious asset bubble than Japanese government bonds. Ten-year yields at 0.07% would seem less irrational if not for the developed world’s biggest debt burden being financed by a shrinking population that’s barely had a pay raise in two decades. Any jump in rates related to inflation fears would slam banks, pension funds, insurance firms, corporate balance sheets, government-linked institutions, individuals and, of course, Tokyo.
An underappreciated problem is how talk of 2% inflation just around the corner is scaring households. When Prime Minister Shinzo Abe hired Haruhiko Kuroda to run the Bank of Japan in March 2013, the plan was to break the “deflationary mindset.” Not an easy feat in a nation gripped by stagnant wages and myriad recessions for 27 years now. Yet Kuroda’s team made it harder by talking ad nauseam about how higher living costs are approaching – the economic equivalent of ominous storm clouds on the horizon. Kuroda’s ploy to conjure up inflation by changing the collective Japanese psyche backfired on two levels.
One, it ignored the extent to which households began to enjoy some of the effects of deflation. In stagnant-wage, high-tax Japan, sliding consumer prices were akin to a stealth tax cut. When Japan’s 1980s bubble economy collapsed, assets plunged. Stocks imploded and land prices collapsed, but Japan circled the wagons to support its gross domestic product bubble. That’s why Japan’s consumer-price deflation has been more genteel than devastating — like a steady, but orderly hydraulic downshift.
It’s a phenomenon that economists like Kosuke Motani, author of “The Real Face of Deflation,” have explored in meticulous detail. Motani, for example, warns that today’s “non-monetary deflation” is a result of everyday costs having risen to irrational levels decades ago. Slowly, but surely, deflation is letting air out of that consumer price bubble. Japan’s deflation, in other words, is secular, not cyclical. At the same time, a rapidly-aging population is inherently deflationary. It’s a very important point: falling prices are a symptom of Japan’s troubles, not the cause.
Another reality check to consider: deflation is, in some ways, a collective choice on the part of politicians, businesspeople and consumers. Rather than deal with huge, destabilizing industrial restructuring, Japan opted for a multi-year slide in consumer prices. It’s been the path of least resistance, one that encouraged Japan’s fabled salarymen to accept stagnant wages over disruption and lawmakers to favor amassing huge debts, bailouts, and yen depreciation over the creative destruction counseled by Joseph Schumpeter and his ilk.
Today’s twentysomethings have heard about inflation, they’ve just never experienced it. Deflation, it’s worth noting, has shaken up Japan far more than Abenomics. While it’s a disaster for debt holders, deflation prodded industries from autos to electronics to apparel to services to boost competitiveness and consolidate. An explosion of smartphone app innovation, for example, is forcing Japan Inc. to raise its game as twenty somethings raise their living standards via technology. Japan’s most celebrated global name of recent years, remember, is Fast Retailing’s Uniqlo – selling affordable Chinese-made clothing and accessories — not Toyota or Sony. Fast Retailing is harnessing deflationary forces, not looking to Abe and Kuroda to save the day. As a result, the 2%-inflation-is-around-the-corner manta is backfiring spectacularly. If only Kuroda had targeted 2% GDP instead — or 2% wage increases — the BOJ might have more to show for its historic easing. Kuroda’s inflation chatter is just traumatizing the masses and deepening the deflationary mindset.
Published in Daily Times, July 30th , 2017.