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DEFLATION DEJA VU

Tim Kelly

Forbes, December 7, 2009

Just over four years since it clawed its way out of a consumption-sapping cycle of price slides that sucked the vitality out of Asia's biggest economy, Japan is back in deflation, officially at least. The news wasn't, however, greeted across the archipelago with panic, riots or wailing, just a little hand-wringing, and weary here-we-go-again sighs.

The feeling of deflation deja vu was compound by the nation's central bank response, which amounted to more of the same. The Bank of Japan is keeping the nation awash in corpuscles of cash in the hope that like an over-oxygenated athlete, the Japanese economy might burst into a sprint.

The official return to deflation didn't shock most Japanese, because after two decades of post-bubble stagnation, it never really felt like Japan had left deflation. Many are happy to keep it that way -- after all, how many shoppers are going to complain when goods get cheaper? When wages are shrinking and taxation and social welfare costs are ballooning, people will insist on value for money, especially when they have been overpaying for goods and services for years.

Even after several years of deflation Japan, or Tokyo at least, still features near or at the top of international cost-of-living comparisons. Lots of middlemen, and overstaffing are a few of the reasons why Japanese consumers are squeezed at every step of the distribution chain for what amounts to a de facto charge to keep unemployment low and vested interests vested. The price slide is rightly giving economists the jitters, because unchecked, it could bring the economy to a halt. But the still-high prices paid by Japan's consumers suggest there is a way to go before the nation reaches its equilibrium. The upside is that it will force Japan into the kind of structural change needed to boost productivity that its political leaders dare not suggest.

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