Japan's deflation pledges lose currency
By Catherine Makino
TOKYO - Japanese Finance Minister Naoto Kan and Bank of Japan governor Masaaki
Shirakawa pledged on Tuesday to reverse the country's deflation, for years the
scourge of the economy, with Kan setting a goal of "two to three years" for
"signs of being out" of the era of declining prices.
That is a long wait for the crowd of job seekers that gathers daily at the
"Hello Work" employment service agency in the Ota-ku district of Tokyo, one of
its 545 outlets around Japan.
Japan's shrinking economy, now no bigger than it was in 1991, means fewer jobs
are available for an increasing number of unemployed workers. At the rotting
heart of the economy is deflation. Falling prices mean bargains for those who
can buy goods - but they are also a deterrent to such purchases that can
be delayed, given the prospect that prices will fall even further. Price cuts
eat into profits, leading to lower investment, lower pay, factory closures -
and the resulting lower spending by consumers continues the downward cycle.
"It's a vicious circle," said Ed Merner, chief executive at Atlantis Japan
Growth Fund in Tokyo. "Lower wages, depressed consumer spending, an endless
demand for lower prices - everyone wants a discount." Companies are trying to
bring this into balance by reducing their fixed costs, which means firing more
employees and reducing wages.
The January consumer price index for Tokyo, considered a leading indicator of
nationwide price trends, fell a preliminary 2% from the same month a year
earlier, data from the Ministry of Internal Affairs and Communications show.
The drop was the ninth consecutive month of decline. Nationwide, the consumer
price index fell 1.3% on-year in December, the ministry said. Gross domestic
product shrank to an annualized 471 trillion yen (US$5 trillion) in the third
quarter of last year, without accounting for changes in prices, the lowest
level since 1991.
Kan took office in January, about four months after the Democratic Party Japan (DPJ) ended the near-continuous 54-year grip on power held by the
Liberal Democratic Party (LDP).
At a parliamentary budgetary committee session on Tuesday, Kan took aim at the
central bank, which holds responsibility for setting interest rates and which
has held these at near zero since 1999. "Candidly speaking, I still want more"
from the central bank to prop up growth, Kan said.
As recently as January 26, the Bank of Japan (BoJ) policy board voted
unanimously to keep its policy target interest rate at the low level of 0.1%.
Given the BoJ's forecasts, it won't raise the benchmark interest rate at least
through the year ending March 2012, BusinessWeek reported on Wednesday, citing
Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in
Tokyo.
The BoJ is independent and has the power to set its own inflation target.
Changing the BoJ Act, under which it operates would allow the government to set
the target - and be obliged to meet it, with a failure to do so leading to
criticism in parliament. Those in the Ministry of Finance who are critical of
the BoJ say the government could redraft the BoJ Act quickly and have an
inflation target by morning, according to Stephen Church, an economist for
Japaninvest, a financial consultancy in Tokyo. That, combined with a revamped
taxation policy, would help rid the country of deflation.
Retailers are at the front line of the battle with falling prices and declining
demand, and upmarket sellers of vanity goods favored by the rich and the older
generation have not escaped and most brand name goods have recorded lower
sales, according to Merner.
Italian luxury retailer Versace, which went to Japan in 1981, closed its
remaining three boutiques in Tokyo's ritzy Ginza district last October because
"it no longer represented the brand image". It now intends to boost its
presence in brand-hungry China, adding a new outlet to its 26 stores already in
that country. Versace chief executive Giancomo Ferrais recently said the
company would start again from scratch in Tokyo and open a store there in 2011.
LVMH Moet Hennessy, an international group with over 50 luxury brands, says its
Louis Vuitton unit has halted plans to open in Tokyo's business district.
As international luxury goods outlets shutter, big Japan-based department
stores are turning to mergers to survive, according to Mikihiko Yamato, a
retail analyst for Japaninvest. Isetan merged with Mitsukoshi in 2008 and has
since acquired Iwataya and Marui Imai department stores. Those followed the
merger in 2007 of Daimaru and Matsuzakaya, further reducing choice for
consumers.
"There were about 10 big names and many local players in the countryside a
while ago," Yamato said. "But there isn't any more room for local players to
survive or stand alone. Even the majors merged in the last five years. These
four major groups are currently closing unprofitable stores one by one."
As they attempt to make their yen stretch further, many shoppers in the capital
are turning to online retailers or discount shopping malls outside central
Tokyo. Online retailers' total sales rose nearly 14% to 6.1 trillion yen in
2008, according to the Ministry of Economy, Trade and Industry.
Even Uniqlo, which has become Japan's biggest retail success story over the
past decade with its China-sourced, low-priced but good-quality clothing, is
beginning to suffer. Uniqlo owner Fast Retailing last week said same-store
sales in Japan dropped 7.2% in January. The number of Uniqlo customers dropped
2.3% and they spent less, with sales per shopper falling 5% in the month, Fast
Retailing said. It was the first drop in sales in six months, Bloomberg
reported.
The poor showing came after the attraction of the retailer's imitation leather
jackets and fleece sweaters helped to drive a 57% year-on-year jump in net
income to US$374 million for the three months to November last year.
Tadashi Yanai, Fast's chairman and president and Japan's richest man, is making
sure that his US$9 billion wealth is not eroded by his country's struggling
economy by opening Uniqlo outlets overseas, where it now has 123 outlets
compared with 793 in Japan.
"Asia has the number one potential for growth and our operations there will
become a leading revenue source," he told reporters in New York last month.
That would be Asia ex-Japan. Average monthly wages in the country dropped 3.9
percentage points last year, their fastest pace of decline since comparable
data became available in 1991 and the third straight year of falls, while
overtime, bonuses and the size of the full-time workforce fell, according to
the Ministry of Health, Labor, and Welfare.
Property owners are also being hurt by asset deflation, with houses worth less
and stock prices down. The outlook for company pensions is also uncertain.
"The mood is grim," Merner told Asia Times Online, "but nothing stays the same
forever and there are signs that the economy is going to slowly recover and
eventually prices will go up, perhaps for the wrong reasons."
If the government keeps borrowing it will reach a point where it has borrowed
too much, is unable to pay the money back, and it will have to print money very
aggressively and this will lead to inflation, rising land prices and higher
prices for everything including food, clothing and shelter, Merner said.
Merner estimates that Japan probably has three to six more years before things
become critical, and the recent downgrade by one leading credit rating company
was a wake-up call.
"Maybe, just maybe, the ship will change course and start moving in the right
direction," he says, "but probably things will have to get worse before they
get better."
For all that, while the DPJ blames the LDP for the mess, it is doing little on
its own to stimulate the economy, Hiroki Matsumoto, an economist and senior
researcher at Global Investment Research, said. "They have programs such as
giving aid for raising children because of the low birthrate, but that doesn't
increase salaries or help investors."
Japaninvest economist Church says the problem goes back to the LDP system.
"The Bank of Japan and Ministry of Finance bureaucrats have been asleep at the
wheel of monetary and fiscal policies over the past 20 years," Church said.
"The LDP permitted the policy drift to continue ... at the expense of ordinary
citizens." Investors want to see substantial policy change as soon as possible,
he said.
"The sensible practical policies of the European Union and inflation targeting
clearly show how things have to go, but the obstacle is the resistance of the
bureaucrats and the three ministries: Ministry of Finance, Ministry of Justice
and the Bank of Japan."
As far as the BoJ is concerned, little in the way of change appears likely in
the near future, for all the chiding of Finance Minister Kan. BOJ governor
Shirakawa reiterated on Tuesday that it was "extremely important" for Japan's
economy to overcome deflation - then said the bank would continue with its very
accommodative monetary policy stance.
Whether Japan can reverse the deflationary trend will depend on the world
economy recovering down the road, he said.
"We expect that if the global economy picks up, that will likely boost
potential economic growth and shrink the demand-supply gap," which could help
push Japan's prices higher, Shirakawa said.
There are small signs of hope. Household spending increased in January by a
price-adjusted 2.1% on a year earlier. Data released this week show a 20%
month-on-month rise in core machinery orders, while machine tool orders in
January were up 192% year-on-year. That should lead to more jobs becoming
available to the queues outside Hello Work outlets and other employment
agencies.
Even so, many Japanese, such as 26-year-old Takashi Hirato, who works at a
fitness gym, have lost hope.
"I've lost trust in the government because we've been in a financial crisis for
15 or 20 years," he said. "We need to see some leadership because the system
isn't working."
He says he gave the DPJ a chance. "Now I feel useless because my vote can't
really change the country."
Catherine Makino is Tokyo-based journalist.
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