Inflating deflation worries put Japan in a spot of bother

Inflating deflation worries put Japan in a spot of bother

The battle has also come to epitomise a destructive pattern repeated across Japan’s economy. By cutting prices hastily and aggressively to attract consumers, critics say, restaurants decimate profits, squeeze workers’ pay and drive the weak out of business — a deflationary cycle that threatens the nation’s economy. “These cutthroat price wars could usher in another recessionary hell,” the influential economist Noriko Hama wrote in a magazine article that has won much attention. Deflation is back in Japan as it struggles to shake off the effects of its worst recession since World War II.

While prices have fallen elsewhere during the crisis, deflation has been the most persistent here: consumer prices among industrialised economies rose by a robust 1.3 per cent in the year to November, but fell 1.9 per cent in Japan. In the decline, firms that undercut rivals too aggressively are being chastised as reckless at best, or as traitors undermining the country’s recovery at worst. Every markdown of beef bowl prices by the big three restaurants –– Sukiya, Yoshinoya and Matsuya — has been promptly broadcast by the national news media here. Japan has reason to be worried. Deflation hampered Japan from the mid-1990s, after the collapse of its bubble economy, to at least 2005.

Households held back spending on big-ticket goods, knowing they would only get cheaper. Companies were unsure of how much to invest. At the time, the three beef bowl chains were in a similar price war. Still, government officials back then emphasised the supposed benefits of deflation; falling prices were good for households, they said. Others said deflation would help restructure the economy by weeding out weak companies.

But the drawn-out deflationary cycle weighed heavily on Japan’s recovery. Apart from putting a damper on consumption and investment, asset deflation ravaged the country’s banks and shut out new businesses from credit. Now that deflation is back, Japan is wary!

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