Δείτε εδώ την ειδική έκδοση

Deflation: The power to destroy weak business

Deflation, the bugbear of Japan's economy during the first half of the last decade, has returned with a vengeance since the financial crisis, creating a receptive audience for such survival guides, however austere their counsel.

Consumer prices, the standard measure of deflation, fell 1.3 per cent last year, excluding the volatile cost of fresh food, the biggest decline since records began. Such changes quickly add up: Japanese prices are back to where they were in the mid-1990s. Prices in the UK have risen 30 per cent since then.

Atsushi Mizuno, a former governor of the Bank of Japan now at Credit Suisse, warns a "deflationary mindset" is taking hold of the country and making deflation harder to shake off. When everyone slashes spending at once, the economy gets worse, hurting even yen-pinching ascetics in the end.

Deflation's effects are well documented, and dangerous enough that Japan's experience has become a favourite worst-case scenario of policymakers in other countries, as they try to keep alive an increasingly sick-looking economic recovery.

Persistent price falls increase real debt burdens, rob central banks of their most effective recession-fighting tool (nominal interest rates can only fall to zero, even if price changes turn negative), and discourage consumption by dangling the promise that goods and services will be even cheaper down the road.

In a country where full-time workers still enjoy strong legal protections, deflation has been blamed for growing social inequality, as companies supplement their expensive permanent workforces with low-paid and easy-to-fire temps.

It has also helped lift the yen to a 15-year high against the dollar - hurting exporters such as Toyota and Panasonic and putting even more pressure on the domestic economy. "The yen's strength slows growth and cuts import prices, making deflation worse," says Richard Jerram of Macquarie Research.

Not all Japanese suffered deflation equally. Lower prices mean salaried workers can stretch pay further (though bonuses, which can account for more than a quarter of annual income, have often withered).

Old people on fixed incomes have done well, too - a situation that some believe makes the government less motivated to tackle the problem. More than 20 per cent of Japanese are past retirement age, and thanks to a voting system that favours depopulated rural areas, their votes carry even more weight.

"At the centre of the problem is the rule [of Japan] by the elderly," says Nobuo Ikeda, an economist and blogger.

Japan can blame part of its troubles on the global forces that have, for a generation, kept inflation mild in other countries - such as the entry of China, India and other low-wage producers into the world trade system. But the impact has been compounded by domestic strains: a flat-to-shrinking population and lingering over-capacity from its 1980s asset bubble.

Such "structural" causes are often cited by the Bank of Japan in response to critics - and there are many - who say it has done too little to combat price declines. The central bank pioneered unorthodox "quantitative" easing in 2001 when it began plying commercial lenders with ultra-cheap cash, after it had cut short-term interest rates to zero with little effect.

In the wake of the great recession, however, the BoJ has looked timid beside the US Federal Reserve and Bank of England, which have taken quantitative easing further by printing cash to buy up government debt. The BoJ has expanded its balance sheet slightly, but its efforts remain focused on trying to induce commercial banks to lend - even though defensive-minded companies hardly seem desperate to borrow.

For industry, coping with deflation has meant slashing costs and, in many cases, moving production abroad. Nissan is selling Thai-made cars in Japan, while Yamaha, the musical instrument maker, began importing pianos this year. The low-end models, made at a Yamaha factory in Indonesia, sell for about 20 per cent less than the company's cheapest made-in-Japan versions.

According to the company, "consumers are coming to accept a wider range of products made outside Japan".

The few businesses that have prospered from deflation have certain traits in common, such as global supply chains and management that is relentless about squeezing out costs.

Uniqlo, the clothing-store chain, has conquered Japan with its Y2,000 ($24) fleece jumpers and made its founder, Tadashi Yanai, the country's richest man. Mr Yanai now wants to grow Uniqlo and its parent, Fast Retailing, into the world's dominant clothing company.

For investors, deflation's power to destroy the weak makes it all the more important to choose carefully. "For every 100 Japanese companies there will only be one with Uniqlo's capabilities," says Kazuyo Katsuma, a businesswoman and author. "The other, regular companies won't be able to handle the price competition, and will be forced to restructure or fold."

© The Financial Times Limited 2010. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation


blog comments powered by Disqus