Video #8 - Japanese Deflation
Monday, January 09, 2006BACKGROUND INFORMATION
The Japanese government announced in March that the Consumer Price Index fell 0.4 in 2000, after a 0.3% fall the previous year. That meets the international definition for deflation, which is two consecutive annual declines in prices. This is the first time in the post-war era that that has occurred in the world’s second largest economy. Experts blame a vicious circle of sluggish spending, falling prices and shrinking corporate profits.
Taro Aso, State Minister for Economic and Fiscal Policy, said the condition was “mild”, but he warned that its psychological impact could grow. While insisting that the economy was still on a long-term course towards growth, his department blames external factors such as the economic slowdown in the United States and many Asian countries.
Nevertheless, Haruhito Arai, a cabinet office economist, diagnosed the trend as “virulent" and noted that, internationally and historically, it is very rare for the Consumer Price Index to fall for two years in a row. According to Jonathan Watts of "The Guardian," no other developed economy is suffering from deflation, which was last seen on a global scale during the Great Depression of the 1930’s”.
Experts also site domestic factors. They claim a combination of rising unemployment and renewed concerns about the banking sector is keeping consumers from spending. These concerns arise from the sharp decline of share prices on the Tokyo Stock Exchange since the start of the year. Many banks had counted on gains in their stock holdings to write off an estimated 30 trillion yen ($) in non-performing loans.
Deflation in Japan can have devastating effects. It chips away at asset values, increases credit risks, pinches wages and salaries, and prevents the economy from generating any sustained growth after a decade of stagnation. According to the New York Times, stocks are trading at the same prices of 15 years ago, and land values in major cities, which back many of the loans made by Japanese banks, have fallen 65 percent from their peak in 1991. Excluding fresh foods, prices dropped 1.1 percent last year, the greatest decline since World War II.
“A crisis of pernicious deflation, which could destroy people’s lives, is looming,” declared the Yomiuri Shimbun, the most conservative of Japan’s major daily newspapers, in a front page editorial. With growth slowing in the United States and elsewhere, many experts fear that another slump in Japan means problems for the rest of the world.
Unfortunately, the news continues to worsen. Early in March, the government reported that machinery orders, an important indicator of investment, fell nearly 12 percent in January from the previous month. Additionally, Finance Minister Kiichi Niyazawa shocked Tokyo when he told Parliament that the government’s books were close to a “catastrophic situation.”
An article from The New York Times offers a personal example to illustrate the results of deflation. “When Hitoshi Matsushita started pondering his impending retirement seven years ago, his first concern was putting a roof over his head. I was living in company housing,” he said, “I thought buying a place would be convenient for my future.” In 1994, prices for housing had already started to decline after Japan’s bubble economy had burst. The 76 million yen ($636,000) that Mr. Matsuchita paid for his apartment looked like a bargain. But real state prices have continued to fall, leaving the home now worth at most 40 million yen-and Mr. Matsuchita still owes the bank 30 million yen. “I can only work until I’m 70, and at that point, I guess my life will crash,” said Mr. Matsushita, who is now 66. “Right now, I’m desperate.””
Paradoxically, many still see deflation as a force for accelerating economic modernization. It is also regarded as a sign that Japan is finally opening its doors to international competition. Caffe latte sells at 320 yen compared with the kissaten, traditional Japanese coffee shops, which sell small size cups of coffee for more than twice that amount. There is also Uniqlo, perhaps the most popular store in Japan at the moment, which imports its apparel products from China. The Gap-like chain is putting enormous pressure on its Japanese competitors.
Additionally, stable or even slightly declining prices can benefit older Japanese by preserving the value of their savings. Deposits held in postal savings accounts nominally earn 0.11 percent a year, but deflation has lifted the real return by almost 2 percentage points over two years.
On the other side of the debate, many economists warn that Japan risks being sucked into a dangerous deflationary spiral that may only worsen as companies are forced to cut prices and wages repeatedly. “We have gone beyond the point where the deflation we are seeing can be attributed to globalization and greater competition,” said Takatoshi Ito, Deputy Vice Minister for International Affairs at the Ministry of Finance. “Deflation is now the mirror image of falling demand, and that’s not good deflation.”
According to The New York Times, some economists argue that Japan needs more deflation as a form of shock therapy. Fewer debts, greater efficiency and a reallocation of labor, they say, is precisely the bitter medicine the economy must swallow. “If deflation continues, inevitably it will put further downward pressure on wages, and if wages are cut, then prices will have to fall too,” said Tadashi Nakamae, an outspoken economist. “I think Japan needs to accept that. Later, it will be offset by higher growth.”
SOURCES:
The Times of India, March 31, 2001 "Deflation Tightens Grip on Japan." www.timesofindia.com/210301/31inte20.html
Rahman, Bayan, "BoJ Governor warns of deepening deflation." Financial Times, April 17, 2001 www.ft.com
Strom, Stephanie, "Japan is shackled by deflation, blocking its hope for recovery." The New York Times, March 12, 2001 www.nytimes.com/2001/03/12/business/12DEFL.html
Watts, Jonathan, "Prices all for second year as Japan slides into deflation." The Guardian, March 17, 2001 www.guardianunlimited.co.uk/Print/0,3858,4115337799966,00.html
LESSON PLAN
GRADE LEVEL/SUBJECT:
10-12/Economics, International Relations, World History, International Bachelaurate Programs (IB), Current Events.
PURPOSE:
To present activities to be used at a variety of classroom situations in order to enhance student understanding of the Japanese economy and its significance globally.
OBJECTIVES:
Students will be able to:
- Define deflation
- Describe the effects of deflation in a nation’s economy.
- Describe the effects of deflation on the Japanese economy.
- Compare and contrast the effects of deflation at different times in different countries.
- Forecast the future of the Japanese economy given the current state of affairs.
MATERIALS:
- Background information provided.
- Resources on Japan available at your school’s Media Center and the Public Library
System in your area.
- Background information available through Internet “search engines”.
ACTIVITIES:
May be assigned as group activities or as individual tasks. They may also be designed as preparation for related presentations either by individuals or groups.
- Research the effects of deflation at different times in different places.
- Research the effects of deflation on the Japanese economy now.
- Draw Venn diagrams to show the differences and similarities between the situation in Japan today and that of other nations you have researched.
- Create a panel discussion with students role playing real life situations of people who have been affected by the economic situation in Japan today.
- Create a scenario forecasting the economic situation in Japan for the next five years.
EVALUATION:
Individual assignments should be graded by the teacher using established criteria.
Group activities, presentations and projects may be evaluated by teachers and students using the following criteria and scale:
Content
Creativity
Clarity
1 = Superior (A) 2 = Excellent (B) 3 = Good (C) 4 = Fair (D) 5 = Poor (F)
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