Price-cutting in Japan points to repeat of deflation misery

Japan, which showed the world how awful a sustained bout of deflation can be, may be heading back into that vortex.

The country’s main index of consumer prices dropped 1.1% in May from a year earlier, the biggest decline since 2002, the government said Friday.

Oil is part of the explanation here: Because crude prices have fallen so far from their peaks a year ago, they’re exerting unusual downward pressure on inflation rates. In the U.S. the consumer price index, including food and energy costs, was down 1.3% in May from a year earlier, the biggest drop since 1950.

But excluding food and energy the U.S. CPI was up 1.8% in May from a year earlier. In Japan, by contrast, the CPI ex-food and energy was down 0.5% in the same period, signaling more widespread price cutting.

Japan is much more sensitive to the risk of true deflation, which is a broad-based decline in prices that can feed on itself and have a severe debilitating effect on an economy.

From Bloomberg in Tokyo:

"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."

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.

Finance Minister Kaoru Yosano said an "extreme" slump in demand and production are causing the drop. "We continue to monitor developments in prices and need to carefully manage the economy to avoid a deflationary spiral," he said.

As Japan struggled in the aftermath of its real estate and banking system crashes of the early 1990s, the economy stagnated in the late 1990s and early 2000s.

That brought on deflation: Japan’s consumer price index fell every year from 1998 to 2002, was unchanged in 2003, then declined again in 2004. The index began to move modestly higher in 2005.

The policy responses of the Obama administration and Federal Reserve to last year’s economic and credit catastrophes have in large part been aimed at keeping the U.S. from falling into a similar deflationary cycle.

The Fed wants to believe it’s winning the battle, as I noted in this post on Wednesday. But many economists say the risk of sustained Japan-style deflation in the U.S. remains high.

-- Tom Petruno

Photo: Shopping in Tokyo. Credit: Toshiyuki Aizawa / Bloomberg News

Comments

[Jim]

Hopefully, deflation is coming to USA as well. This will increase average person's purchasing power and redistirbute wealth fairly back into the hands of those who work and save responsibly. Leth all the debtors be crushed by their speuclative leverage. Deflation is very good. I am going to delay all my purchases as long as possible to get the best price down the road. No rush. I can wait.

[andrew]

Deflation is good? Jim = Dumb. It's not like prices of goods become depressed and purchasing power remains constant. Wages fall, output falls; and economic activity, i.e., spending is what our economy is based on. How can deflation possibly be caegorized as good? With all the stimulus from the Fed anyway, I'd be just as nervous for (hyper)inflation. I'm still puzzled (read: laughing) how deflation "redistributes wealth fairly back into the hands of those who work." See Poland.

[Jim]

Andrew, have you been living on another planet lately? The wages have already fallen (and have been falliing in real terms for last few decades), the credit is collapsing and all of this is not the result of deflation, but the result of bubble blowing by the fed and reckless lending and spending of the last few decades, ie inflationary policies. The MSM will tell you that deflation is to blame for the downward spiral, but if you think with your own mind, you will see that deflation is the consequence of credit collapse, not its cause. Remember we had inflation for many years, and inflation is what caused this Second Great Depression, like the first one, not deflation.
Deflation is a natural phenomenon, when productivity increases and lowers output cost per unit, prices go down, but then the FED comes in an devalues the dollar more, so prices go up.

Savings need to be replenished and savers need to be rewarded not punished. Responsible behavior builds nations, reckless one destroys them. Reckless spending and lending and bubble blowing what got us into this mess in the first place, so recklessness cannot possibly be the solution.

[martscan]

Andrew gets my vote.

[pugtv]

A reduction in price due to an improvement in productivity is a positive event.

A reduction in price due to a cycle of expecting future price reductions is a negative event.

Andrew gets my vote.

[Bill]

With zero debt, ton's of cash. and my wages going up deflation doesn't sound bad. A little inflation and high interest rates doesn't sound bad either.

[Ted]

Deflation is good for honest, prudent people, bad for deadbeats, losers, debtors and speculators in general. On whose side does the U.S. government stand?

[Harold Menter]

Deadbeat losers hope to inflate their debts away, and who can blame them? Honest, prudent Americans, on the other hand, hope the losers fail in the most miserable fashion, as they so richly deserve.