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Concern over Japanese
deflation is increasing. Please consider Japan Succumbs to
Deflation as Consumer Prices Fall Record 1.1%.
Japan’s consumer prices fell at
a record pace in May, adding to the risk that deflation will become
entrenched and hamper a rebound from the nation’s worst postwar
recession.
Prices excluding fresh food slid 1.1 percent from a year earlier after
dropping 0.1 percent in the preceding two months, the statistics bureau said
today in Tokyo. It was the sharpest decrease since comparable figures were
first compiled in 1971.
Bank of Japan Governor Masaaki Shirakawa said last week that price declines
will accelerate through the middle of the fiscal year as demand slackens and
crude oil continues to trade lower than last year’s record. Retailers
including Aeon Co. are cutting prices to attract customers as falling wages
and the worsening job outlook damp spending.
“Profits fall, then wages come down, then consumers stop
shopping,” said Junko Nishioka, chief Japan economist at RBS Securities
Japan Ltd. in Tokyo. “And because people aren’t shopping,
companies lower prices. That’s the process that we’re starting to
see. It isn’t easy to break out of.”
“With demand deteriorating, companies are finding it more difficult to
sell goods and services and are turning to discounting,” said Azusa
Kato, an economist at BNP Paribas in Tokyo.
Some 47 percent of 775 Japanese retailers surveyed by the Nikkei newspaper
plan to lower prices in the year ending March 2010 to spur sales, up from 9
percent a year earlier. Aeon, Japan’s second-largest retailer, this
week started a discount campaign for confectionary, drinks and mayonnaise.
Consumers, whose spending accounts for more than half of the economy, may
delay purchases if they expect goods to get cheaper. That would erode profits
and force companies to cut wages, which have already slid for 11 months. Japan only escaped from a decade of deflation in 2005.
Japanese Deflation
Deepens
As Japanese deflation deepens, Japanese Bonds
Complete 2nd Weekly Gain.
Japan’s bonds gained for a
second week as a government report showed consumer prices fell at a record
pace, adding to signs deflation will hamper the economic recovery and boost
the value of the fixed payments of debt.
Ten-year yields touched the lowest in almost three months after the statistics
bureau said yesterday prices excluding fresh food fell 1.1 percent in May
from a year ago.
“The drop in consumer prices may accelerate to about 2 percent in the
summer,” said Yuichi Kodama, chief economist in Tokyo at Meiji Yasuda
Life Insurance Co., Japan’s third-largest life insurer. “The
10-year yield may decline to 1.3 percent or below as the market needs to
prepare for deeper deflation.”
An “extreme” slump in demand and production are causing the drop
in prices, Finance Minister Kaoru Yosano said yesterday. “We continue
to monitor developments in prices and need to carefully manage the economy to
avoid a deflationary spiral.”
The Organization for Economic Cooperation and
Development this week urged the Bank of Japan to keep pumping cash into the
economy “until underlying inflation is firmly positive.” Since
it cut the key interest rate to 0.1 percent in December, the central bank has
been buying corporate debt and increased government bond purchases from
lenders to revive growth.
Japan Fighting Deflation
For Decades
Notice the misguided advice by the OECD about pumping cash into the economy. Japan has been doing this for 15 years and all they have to show for it is massive national
debt and bridges to nowhere.
Will Deflation Derail A Japanese Recovery?
Jun Saito, a top Japanese economist says Deflation May
Derail Japan Recovery.
Deflation
“will exert a significant amount of downward pressure on the
recovery,” Jun Saito, an adviser to Economic and Fiscal Policy Minister
Kaoru Yosano, said in an interview yesterday in Tokyo. “An increase in
deflationary expectations will raise real interest rates and that will
restrain business investment.”
“Declining prices will mean lower profits, less investment and wage
cuts that will weaken consumer spending further,” said Hiroshi
Miyazaki, chief economist at Shinkin Asset Management Co.
According to Saito, who quantifies the risk of deflation by using government
data and figures from the International Monetary Fund, the risk of persistent
price declines climbed to the highest level since 2003 and almost doubled
since last year.
“I think there’s a risk we may slip back into deflation,”
Saito said, adding that he defines it as a sustained decline in prices.
Japanese companies cut spending at the fastest
pace in 54 years in the three months ended March 31. Wages have dropped for
11 months and households reduced spending for a record 14th month in April.
Falling prices are a blow to households who
borrow money because it makes it harder to repay debt, Saito said. Consumers
will cut back spending if entrenched price declines push up their borrowing
costs, he added.
Deflation Misinformation
There is so much misinformation in the above articles it's hard to know where
to begin. For starters, inflation and deflation are monetary measures not
price measures. However, let's talk about prices for a change.
The idea that "Falling prices are a blow to households who borrow money
because it makes it harder to repay debt" is preposterous. When prices
fall, consumers have more money and they can pay off debts faster, provided
of course they have a job. Falling prices reward the fiscally prudent, which
is the way it should be.
Falling home prices do encourage more mortgage walk-aways which is another
matter. However, home prices must drop to the point of affordability before a
recovery in housing can begin, so even falling home prices are desirable. The
sooner home prices fall to the point of affordability, the better of everyone
will be.
In general, falling prices are good for consumer balance sheets. Imagine the
problems we would have if prices were soaring with the unemployment rate
approaching 10%.
Profits are falling along with prices because demand is returning to some
sense of normalcy that businesses did not plan for. In the meantime, cash
strapped consumers spent recklessly for decades and need to save. They are.
Proof is easy to find: US Savings Rate
Hits 6.9%, Highest In 15 Years.
This saving is not bad for business as Keynesian clowns believe. Savings
provides capital for businesses to expand. For more on this as well as a
rebuttal to the ridiculous concept callled "Paradox of Thrift",
please see Families Start
Saving; Does This Aggravate The Nation's Woes?.
The only reason it appears that savings is bad is after decades of loose
credit and monetary expansion by the Fed the world is awash in overcapacity. Now
is payback time for misguided Fed polices and reckless consumer spending.
This recession and a rising savings rate are both necessary ingredients to
restore fiscal sanity. Deflation should not be feared; deflation should be
embraced. What should be feared is the reckless expansion of consumer and
corporate credit made possible by Fed policies under both Greenspan and
Bernanke. Deflation is not the problem, it is the cure for those reckless
policies.
Ironically both Greenspan and Bernanke encouraged Japan to write off bad
debts as the means to return to normalcy. However Bernanke Suffers
From Selective Memory Loss and cannot follow his own
advice.
Addendum:
The Fed likes to portray itself as being an "inflation fighter"
when the ONLY source of inflation is the Fed itself. Because of rising
productivity over time, the natural state of affairs is actually deflation.
Mish
GlobalEconomicAnalysis.blogspot.com
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