What It Means to Live in a Deflation Era

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA

The real-life example of years spent living through the nightmare called deflation is Japan. The country had to take on rather drastic measures to revive its lethargic economy, its growth tightly bound with high unemployment, almost non-existent domestic demandand
high-rising yen just killing off any hopes of thriving exports and positive international trade balance.

Just two days ago, Japan’s central bank said that its key rate would remain at the rock-bottom rate of 0.1%, while the money supply would keep on expanding. Until when and for what purpose remains a mystery laced with borderline monetary policy insanity. It’s been years. The Bank of Japan should have realized by now that what it has been doing to overcome deflation is not working and that applying the same monetary policy over and over again, expecting different results, is a clear sign of idiocy. The only problem is: what else could it have done?

Deflation and declining consumer spending are simply killing Japan’s economy. For the past eight months, prices in Japan have been spiraling down the toilet and the Bank of Japan does not see them changing direction until end of 2011! At the same time, Japan’s Business Federation announced that it expects a decline in workers’ bonuses of 15.9%, which is bound to curb anyone’s holiday shopping enthusiasm. As the Bank of Japan’s governor, Masaaki Shirakawa, explained, “The cause of sustained price falls is a lack of demand. When demand itself is weak, prices won’t rise just through liquidity provision.” Duh!

Japan’s day-to-day deflationary reality is harsh; there are no other words to describe it. Prices and wages are declining persistently. The Japanese are delaying the purchase of new cars or appliances, hoping prices are going to be even lower a few months or years down the road. Renters, who abound in Tokyo, seem pleased that prices of food, clothing and housing are declining, but they keep forgetting that declining prices and shrinking demand are literally causing their own incomes to slowly, but surely, degenerate. The deflationary momentum seems able to feed itself indefinitely.

Perhaps the memory of the 1980s hyperinflation has had the Japanese accept deflation as the lesser of two evils. Some 30 years ago, trips between two Japanese cities, either by train or by plane, could cost double the flight to Singapore. Parking in Tokyo cost anywhere between $200.00 and $600.00 a month, while renting was out of reach for many with a price tag of $1,000 for a ridiculously small apartment by North American standards. Perhaps this is why the Japanese may think that deflation is not as bad as conventional economic wisdom would lead them to believe. After all, what better way to boost consumption than declining prices and negative interest rates?

Alas, this is faulty logic. Sure, after years of price stupidity, food, clothes and housing are now cheaper in Japan. But what is also declining in value is real estate and, while everyone waits for even cheaper things a few months or years down the road, the Japanese economy is literally at a standstill, because the demand is not the only thing that is in a slump. Lending for “big ticket” items has completely lost traction, too.

Finally, a decade of living in deflation has taken an enormous psychological toll, particularly on Japanese youth. Young people find it difficult to be spirited about their future when stuck in what they call “permatemps,” or permanently temporary jobs, which will only make them poorer in the long run than their parents and grandparents were. A sad example is a cheaper and less alcoholic beer, “happo-shu,” which has become a chosen weapon of self-destruction in Japanese bars these days. Sure, it costs less and it tastes OK. But each gulp also means everyone is getting poorer, too.